We will hold the annual meeting of the stockholders of Annaly on May 23, 2013, at 9:00 a.m., New York time, at the New York Marriott Marquis, 1535 Broadway, New York, New York 10036, to consider and vote on the following proposals:

●

election of three directors for a term of three years each and one director for a term of one year;

●

a proposal to approve our entering into a management agreement with Annaly Management Company LLC (the “Manager”) under which it would be responsible for our management (i.e., we would externalize our management and all members of our management, including all of our executive officers, would be employed by the Manager);

●

approval of a non-binding advisory resolution on our executive compensation;

●

ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2013; and

●

any other matters as may properly come before our annual meeting or any adjournment or postponement thereof.

We will transact no other business at the annual meeting, except for business properly brought before the annual meeting or any adjournment or postponement of it by our board of directors.

Only our common stockholders of record at the close of business on April 1, 2013, the record date for the annual meeting, may vote at the annual meeting and any adjournments or postponements of it. A complete list of our common stockholders of record entitled to vote at the annual meeting will be available for inspection during the 10 business days before the annual meeting at our executive offices during ordinary business hours for proper purposes.

Your vote is very important. If you do not provide voting instructions, your shares will not be voted or counted on several important matters. We urge you to vote soon after you receive these proxy materials, which explain how to vote via mail, phone or Internet.

ANNUAL MEETING ADMISSION: If you attend the annual meeting in person, you will need to present your admission ticket, or an account statement showing your ownership of our common stock as of the record date, and valid government issued photo identification. The indicated portion of your proxy card or voter instruction card will serve as your admission ticket.

Our board of directors recommends that you vote:

●

“FOR” the election of each of the nominees as directors;

●

“FOR” the proposal to approve our entering into a management agreement with the Manager;

●

“FOR” approval of the non-binding advisory resolution on executive compensation; and

●

“FOR” the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2013.

By Order of the Board of Directors,

R. Nicholas Singh

Secretary

April 9, 2013

New York, New York

Important Notice Regarding the Availability of Proxy Materials

for the Stockholder Meeting May 23, 2013. Our Proxy Statement and

2012 Annual Report to Stockholders are available at www.proxyvote.com.

TABLE OF CONTENTS

QUESTIONS AND ANSWERS ABOUT THE MEETING

1

PROPOSAL 1 ELECTION OF DIRECTORS

12

Directors

12

Class I Directors

13

Class II Directors

14

Class III Directors

15

CORPORATE GOVERNANCE, DIRECTOR INDEPENDENCE, BOARD MEETINGS AND

COMMITTEES

16

Corporate Governance

16

Board Oversight of Risk

16

Independence of Our Directors

16

Board Leadership Structure

17

Board Committees and Charters

17

MANAGEMENT

20

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ANNALY

21

EXECUTIVE COMPENSATION

22

Compensation Discussion and Analysis

22

COMPENSATION OF DIRECTORS

37

Director Compensation

37

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

38

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

38

EQUITY COMPENSATION PLAN INFORMATION

39

REPORT OF THE AUDIT COMMITTEE

39

PROPOSAL 2 MANAGEMENT EXTERNALIZATION PROPOSAL

41

PROPOSAL 3 APPROVAL OF A NON-BINDING ADVISORY VOTE APPROVING

EXECUTIVE COMPENSATION

PROPOSAL 4 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED

63

PUBLIC ACCOUNTING FIRM

65

Relationship with Independent Registered Public Accounting Firm

66

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

67

ACCESS TO FORM 10-K

67

STOCKHOLDER PROPOSALS

67

OTHER MATTERS

67

WHERE YOU CAN FIND MORE INFORMATION

68

EXHIBIT A MANAGEMENT AGREEMENT

A-1

i

ANNALY CAPITAL MANAGEMENT, INC.

1211 AVENUE OF THE AMERICAS, SUITE 2902

NEW YORK, NEW YORK 10036

______________________

2013 ANNUAL MEETING OF STOCKHOLDERS

______________________

PROXY STATEMENT

Annaly Capital Management, Inc. (“Annaly”, “we”, “our” or “us”) is furnishing this proxy statement in connection with our solicitation of proxies to be voted at our 2013 annual meeting of stockholders. We will hold the annual meeting at the New York Marriott Marquis, 1535 Broadway, New York, New York 10036, on Thursday, May 23, 2013 at 9:00 a.m. New York time, and any postponements or adjournments thereof. We are sending this proxy statement and the enclosed proxy to our stockholders commencing on or about April 11, 2013.

QUESTIONS AND ANSWERS ABOUT THE MEETING

Q:

What am I voting on?

A:

(1)

Election of three directors, Kevin P. Brady, E. Wayne Nordberg and Kevin G. Keyes, for terms of three years and one director, John H. Schaefer, for a term of one year;

(2)

Approval of our entering into a management agreement with Annaly Management Company LLC (the “Manager”) under which the Manager will take over responsibility for our management, and, therefore, we will be externally managed (the “Management Externalization Proposal”);

(3)

Approval of a non-binding advisory resolution on our executive compensation; and

(4)

Ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2013.

Q:

How does the board of directors recommend that I vote on these proposals?

A:

Our board of directors recommends that you vote:

(1)

“FOR” the election of each of the nominees as directors;

(2)

“FOR” the Management Externalization Proposal to approve our entering into a management agreement with the Manager;

(3)

“FOR” approval of the non-binding advisory resolution on executive compensation; and

(4)

“FOR” the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2013.

1

Q:

What is the Management Externalization Proposal being voted upon?

A:

The Management Externalization Proposal would involve us entering into a management agreement with the Manager under which the Manager will take over responsibility for our management, and, therefore, we will be externally managed. Under this agreement, we would pay the Manager a management fee equal to 1.05% of our consolidated stockholders’ equity, as defined below, and the Manager would be responsible for paying all compensation expenses associated with managing us and our subsidiaries. We expect that most of our employees will become employees of our Manager. For regulatory and corporate efficiency reasons, we may retain certain employees as employees of our subsidiaries; however, all compensation expenses associated with such employees will reduce the management fee.

Q:

Are there any cost savings to the Management Externalization Proposal?

A:

Yes. We believe that when comparing the management fee to our annual compensation expenses for 2012, implementing the Management Externalization Proposal would result in savings over the next five years with an estimated net present value of approximately $210.9 million. This estimate assumes stockholders’ equity is equivalent to stockholders’ equity as of December 31, 2012, calculated as defined in the section “Management Fee”, and remains constant for the five year period. This estimate uses a 5% discount rate. This estimate also assumes that annual compensation expenses would have remained what they were in 2012.

We believe we will pay the lowest fixed percentage fee paid to any external manager in our industry.

Q:

What is the effect of the Management Externalization Proposal?

A:

If the ManagementExternalization Proposal is approved by our stockholders, our management will be conducted by the Manager through the authority delegated to it in the management agreement and pursuant to the policies established by our board of directors. The Manager would, subject at all times to the supervision and direction of our board of directors, be responsible for, among other things, (i) the selection, purchase and sale of assets for our investment portfolio; (ii) recommending alternative forms of capital raising; (iii) supervising our financing and hedging activities; and (iv) day to day management functions. The Manager would perform such other supervisory and management services and activities relating to our assets and operations as may be appropriate or may be requested by our board of directors. In addition, in connection with its duties, we expect that the Manager would become an investment advisor registered with the Securities and Exchange Commission.

Pursuant to the Management Externalization Proposal, the employment agreements of our executive officers would be terminated with approval by our executive officers. We will not pay any termination fees to such employees in connection with these terminations. We expect that most of our employees would become employees of the Manager and we would be required to attempt to cause that to happen (and to take any other actions that are reasonably necessary to implement the Management Externalization Proposal). However, the management agreement does not require the Manager to employ, or to continue to employ, any specific individuals (including any current executive officers). All compensation expenses associated with managing our business and those of our subsidiaries would be borne by the Manager, or, if paid by us or our subsidiaries, would reduce the management fee we pay to the Manager. If the Management Externalization Proposal is approved, we do not expect to report in our future proxy statements the compensation paid to the employees of the Manager (including our current executive officers) other than any compensation paid by us to our named executive officers during 2013 prior to the effectiveness of the Management Externalization Proposal.

2

Q:

What is the management fee?

A:

In exchange for providing management, the Manager will receive a monthly management fee in an amount equal to 1/12th of 1.05% of stockholders’ equity. The calculation of the management fee is set forth in the section “Proposal 2 – Management Externalization Proposal – The Management Externalization Proposal – Management Fee.”

Q:

When will we start receiving the benefits of cost savings under the Management Externalization Proposal?

A:

While the Manager would commence performance of the management of our company on July 1, 2013, our shareholders will have the benefit of the compensation savings created by the externalization for the entire 2013 calendar year pursuant to a pro forma adjustment to the 2013 management fee. After the management agreement takes effect, the Manager and our Chief Financial Officer will prepare a pro forma calculation that calculates a pro forma management fee, which will be the management fee as if we were managed by the Manager from January 1, 2013 until July 1, 2013. We will pay the Manager in July 2013 an amount equal to the pro forma management fee minus the actual amount of cash compensation paid to all of our employees (and employees of our subsidiaries) from January 1, 2013 until July 1, 2013.

Q:

What is the term of the management agreement?

A:

If the Management Externalization Proposal is approved, our management agreement would be in effect until December 31, 2014 (and be automatically renewed for a one-year term each anniversary date thereafter). Two-thirds of our independent directors or the holders of a majority of the outstanding shares of common stock would be able to terminate the management agreement for any or no reason, at any time upon one hundred eighty (180) days prior written notice. The Manager would also be able to terminate the management agreement upon one hundred eighty (180) days prior written notice. The management agreement may also be terminated by either us or the Manager with shorter notice periods for “cause” as more fully discussed below.

Q:

Is there a termination fee for terminating the management agreement?

A:

No. There is no termination fee for any termination of the management agreement by either us or the Manager.

Q:

Who is the Manager?

A:

The Manager is Annaly Management Company LLC, a Delaware limited liability company. The Manager is owned by our management.

Q:

Can the Manager be sold?

A:

Yes. Any sale of the Manager without the consent of the independent members of our board of directors will automatically terminate the management agreement without payment by us of a termination fee.

3

Q:

Can the Manager or its employees compete with us?

A:

The management agreement provides that the Manager is prohibited from managing, operating, joining, controlling, participating in, or advising any real estate investment trust whose principal business strategy is based on or who engages in the trading, sales or management of mortgage-backed securities in any geographical region in which we engage in such business.

Additionally, Wellington J. Denahan, Kevin G. Keyes, Kathryn F. Fagan, R. Nicholas Singh and James P. Fortescue will enter into employment contracts with the Manager which prohibit them from working for or advising any of our competitors for one year after their employment terminates if they are terminated for cause or they voluntarily terminate their employment (other than for good reason).

Q:

What steps can we take to align our interests with those of the employees of our Manager?

A:

If the Management Externalization Proposal is approved, we will institute a stock ownership requirement under which our five most senior executive officers, over the next three years, own an amount of our shares of common stock equal to at least 6 times their 2012 base salary which represents an aggregate ownership of $38.7 million.

Q:

Will any employees remain at Annaly or its subsidiaries?

A:

Annaly will have no employees following the externalization. However, some of the employees of our subsidiaries may for regulatory or corporate efficiency reasons remain as employees of our subsidiaries. All compensation expenses associated with such employees will reduce the management fee.

Q:

Why are the independent members of our board of directors recommending approval of the Management Externalization Proposal?

A:

Our independent directors, without the participation of directors who are or are related to members of management, unanimously approved the Management Externalization Proposal and are recommending that our stockholders approve the Management Externalization Proposal.

The independent members of our board of directors believe that the consummation of the Management Externalization Proposal may, among other things, provide us with the following competitive advantages:

●

The fact that if the management agreement had been in effect in 2010, 2011 and 2012, our costs (including tax costs) in those years would have been, respectively, $83.5 million, $104.4 million and $48.0 million lower than they were.

●

Our belief that when comparing the management fee to our annual compensation expenses for 2012, implementing the Management Externalization Proposal would result in savings over the next five years with an estimated net present value of approximately $210.9 million. This estimate assumes stockholders’ equity is equivalent to stockholders’ equity as of December 31, 2012, calculated as defined in the section “Management Fee”, and remains constant for the five year period. This estimate uses a 5% discount rate. This estimate also assumes that annual compensation expenses would have remained what they were in 2012.

4

●

The certainty that a percentage cap on the management fee provides our stockholders.

●

Our belief that the terms and conditions of the management agreement compare favorably to those that our peers are subject to, including having the lowest fixed management fee as a percentage of stockholders’ equity and effectively capping our compensation costs at 1.05% of stockholders’ equity.

●

The capping of our compensation costs at 1.05% of stockholders’ equity also provides certainty to our stockholders that our compensation costs as a percentage of stockholders’ equity will not increase as we diversify our investment portfolio beyond Agency mortgage-backed securities and debentures (i.e., residential mortgage-backed securities and debentures that are issued or guaranteed by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae) by allocating up to 25% of our stockholders’ equity to assets other than Agency mortgage-backed securities and debentures. Management fees as a percentage of stockholders’ equity are generally higher for externally managed REITs that invest in assets other than Agency mortgage-backed securities, and capping our compensation costs at 1.05% of stockholders’ equity provides savings to our stockholders, as compared to comparable externally managed REITs, as we diversify a portion of our investment portfolio into these additional asset classes.

●

Our expectation that shareholders will have the benefit of the compensation savings created by the externalization for the entire 2013 calendar year pursuant to a pro forma adjustment to the 2013 management fee.

●

The greater anticipated ability to retain the proven expertise and substantial experience of our executive officers who we believe are critical to our successful performance in the future and a greater anticipated ability to retain and develop executives as part of our executive succession planning. Our anticipation is based on our belief that the Manager will be better able to structure its employment retention and development programs under the same regulatory and disclosure framework as our public competitors, the majority of which are externally managed, as well as private competitors such as hedge funds and other asset managers.

●

The greater anticipated stability and predictability of annual expenses and cost savings resulting from an externally managed company.

●

Our belief that this will improve the efficiency and alignment of management responsibilities for our various business lines.

●

Our belief that this fee structure is more favorable than if it were based on total assets under management, which could potentially incentivize an external manager to excessively leverage assets under management in an attempt to increase short term incentive payouts.

●

The alignment of shared performance goals through our adoption of stock ownership requirements for certain of our executive officers.

●

Our board of directors is aware that a number of our peers are externally managed pursuant to management agreements between those companies and external managers. This is a trend that has continued during the past several years with respect to a number of recently formed mortgage REITs. For example, since January 2009 sixteen mortgage REITs have conducted initial public offerings. Fifteen of these companies have been externally managed. In addition, an internally managed REIT has converted to an externally managed REIT.

5

●

Our board of directors believes that as an externally managed REIT, we may be more attractive to certain investors and market analysts as the management fee, which replaces our compensation expenses, may be easier to compare to that of our public competitors, the majority of which are externally managed. As such, we may enjoy enhanced market perceptions through the ability of investors to compare us more directly with our public competitors.

●

The elimination of the non-deductibility, under the Internal Revenue Code Section 162(m), of compensation expense relating to certain payments made to certain of our executive officers.

●

Credit Suisse’s review with the independent directors of certain of the material terms of certain publicly available management agreements between various externally managed mortgage REITs and their respective external managers, as summarized below in the section “Review Provided by Credit Suisse”.

Q:

What are the potential risks and negative factors considered by the independent members related to the Management Externalization Proposal?

A:

Our independent members of our board of directors considered certain factors which could, as a result of the Management Externalization Proposal, negatively affect our company and our stockholders. These factors included the following:

●

We would be responsible for paying the management fee irrespective of our performance (unless we terminate the management agreement).

●

The possibility that the financial markets will not view the Management Externalization Proposal in a positive light and that the consummation of the proposal could have a negative effect on the market price of our common stock.

The reduced transparency in individual named executive officer compensation.

Q:

Why am I being asked to approve the Management Externalization Proposal?

A:

The independent members of our board of directors, without the participation of board members who are or are related to members of management, have unanimously approved the Management Externalization Proposal and are recommending that our stockholders approve the Management Externalization Proposal. Under current law, approval by stockholders probably is not required, but our board of directors does not want us to undertake this major step unless our stockholders are in favor of it. If the proposal is approved by our stockholders, our management would be conducted by the Manager and we would enter into a management agreement with the Manager. If our stockholders do not approve the Management Externalization Proposal, then we will continue to operate within our current structure as an internally managed company.

6

Q:

Did we engage a financial advisor in connection with the proposed externalization?

A:

The independent members of our board of directors engaged Credit Suisse Securities (USA) LLC (“Credit Suisse”) to act as their financial advisor in connection with any externalization. In that capacity, in a series of meetings, including the meeting on March 14, 2013 at which the Management Externalization Proposal was approved, Credit Suisse reviewed with the independent directors certain of the material terms of certain publicly available management agreements between various externally managed mortgage REITs and their respective external managers. A summary of certain of the material terms of such management agreements reviewed by Credit Suisse with the independent directors is contained in this proxy statement in the section “Review Provided by Credit Suisse.” Credit Suisse’s review was provided to the independent directors (in their capacity as directors of Annaly) for their information in connection with their evaluation of the proposed management agreement with the Manager and did not address the business decision of Annaly to proceed with the proposed externalization. Credit Suisse’s review does not constitute advice or a recommendation to any shareholder as to how such shareholder should vote or act on any matter relating to the Management Externalization Proposal.

Q:

What happens if the Management Externalization Proposal is not approved?

A:

If our stockholders do not approve the Management Externalization Proposal, we will continue to operate as an internally managed company and the current executive employment agreements will not be terminated.

Q:

Who is entitled to vote at the meeting?

A:

Only common stockholders of record as of the close of business on April 1, 2013, the record date, are entitled to vote at the meeting.

Q:

What quorum is required for the meeting?

A:

A quorum will be present at the annual meeting if a majority of the votes entitled to be cast are present, in person or by proxy. Since there were 947,293,099 outstanding shares of common stock, each entitled to one vote per share, as of the record date, we will need at least 473,646,550 votes present in person or by proxy at the annual meeting for a quorum to exist. If a quorum is not present at the annual meeting, we expect that the annual meeting will be adjourned to solicit additional proxies.

Q:

What are the voting requirements that apply to the proposals discussed in this proxy statement?

A:

Proposal

Vote Required

Discretionary Voting Allowed?

(1) Election of directors

Majority

No

(2) Management Externalization Proposal

Majority

No

(3) Advisory vote on our executive compensation

Majority

No

(4) Ratification of the appointment of Ernst & Young LLP

Majority

Yes

“Majority” means (a) with regard to the election of directors, the affirmative vote of a majority of all the votes cast on the election of a director on a per director basis; provided, however, that in an election of directors, if the number of nominees exceeds the number of directors to be elected at such meeting, the directors shall be elected by the vote of a plurality of the shares represented in person or by proxy at any such meeting; and (b) with regard to the Management Externalization Proposal, the advisory vote on our executive compensation and the ratification of the appointment of Ernst & Young LLP, a majority of the votes cast at the annual meeting.

“Discretionary voting” occurs when a bank, broker, or other holder of record does not receive voting instructions from the beneficial owner and votes those shares in its discretion on any proposal as to which the rules of the New York Stock Exchange permit such bank, broker, or other holder of record to vote. When banks, brokers, and other holders of record are not permitted under the New York Stock Exchange rules to vote the beneficial owner’s shares on a proposal, and there is at least one other proposal on which discretionary voting is allowed, the affected shares are referred to as broker “non-votes.”

7

Q:

What is the effect of abstentions and broker “non-votes”?

A:

Abstentions will be treated as shares that are present and entitled to vote for purposes of determining the presence of a quorum. An abstention is the voluntary act of not voting by a stockholder who is present at a meeting and entitled to vote. Broker “non-votes” will be treated as present and entitled to vote for purposes of determining the presence of a quorum at the annual meeting.

Abstentions and broker non-votes, if any, will have no effect on the election of the directors (Proposal No. 1), the Management Externalization Proposal (Proposal No. 2), the advisory vote on our executive compensation (Proposal No. 3) and the ratification of the appointment of Ernst & Young LLP (Proposal No. 4).

Q:

How will my shares be voted if I do not specify how they should be voted?

A:

Properly executed proxies that do not contain voting instructions will be voted as follows:

(1)

Proposal No. 1: FOR the election of directors;

(2)

Proposal No. 2: FOR the Management Externalization Proposal;

(3)

Proposal No. 3: FOR the advisory vote on our executive compensation; and

(4)

Proposal No. 4: FOR the ratification of Ernst & Young LLP as our independent registered public accounting firm.

The individuals named as proxies by a stockholder may vote for one or more adjournments of the annual meeting, including adjournments to permit further solicitations of proxies.

We do not expect that any matter other than the proposals described above will be brought before the annual meeting. If, however, other matters are properly presented at the annual meeting, the individuals named as proxies will vote in accordance with the recommendation of our board of directors.

8

Q:

What do I do if I want to change my vote?

A:

You may revoke a proxy at any time before it is voted by filing with us a duly executed revocation of proxy, by submitting a duly executed proxy to us with a later date or by appearing at the annual meeting and voting in person. You may revoke a proxy by any of these methods, regardless of the method used to deliver your previous proxy. Attendance at the annual meeting without voting will not itself revoke a proxy.

Q:

How will voting on any other business be conducted?

A:

Other than the four proposals described in this proxy statement, we know of no other business to be considered at the annual meeting. If any other matters are properly presented at the meeting, your signed proxy card authorizes Wellington J. Denahan, our Chairman of the Board of Directors and Chief Executive Officer, and R. Nicholas Singh, our Secretary, to vote on those matters according to their best judgment.

Q:

Who will count the vote?

A:

Representatives of Broadridge Financial Solutions, Inc., the independent Inspector of Elections, will count the votes.

Q:

Who can attend the annual meeting?

A:

All stockholders of record as of April 1, 2013 can attend the annual meeting, although seating is limited. If your shares are held through a broker and you would like to attend, please either (1) write us at Investor Relations, Annaly Capital Management, Inc., 1211 Avenue of the Americas, Suite 2902, New York, New York 10036 or email us at investor@annaly.com, or (2) bring to the meeting a copy of your brokerage account statement or an omnibus proxy (which you can get from your broker).

In addition, you must bring valid, government issued photo identification, such as a driver’s license or a passport. If you plan to attend, please check the box on your proxy card and return it as directed on the proxy card. In addition, if you are a record holder of common stock, your name is subject to verification against the list of our record holders on the record date prior to being admitted to the annual meeting. If you are not a record holder but hold shares in street name, that is, with a broker, dealer, bank or other financial institution that serves as your nominee, you should be prepared to provide proof of beneficial ownership on the record date, or similar evidence of ownership. If you do not provide valid government issued photo identification or comply with the other procedures outlined above upon request, you will not be admitted to the annual meeting.

Security measures will be in place at the meeting to help ensure the safety of attendees. Metal detectors similar to those used in airports may be located at the entrance to the auditorium and briefcases, handbags and packages may be inspected. No cameras or recording devices of any kind, or signs, placards, banners or similar materials, may be brought into the meeting. Anyone who refuses to comply with these requirements will not be admitted.

9

Q:

How will we solicit proxies for the annual meeting?

A:

We are soliciting proxies by mailing this proxy statement and proxy card to our stockholders. We will pay the expenses incurred in connection with the printing and mailing of this proxy statement. In addition to solicitation by mail, the directors, officers and our employees, who will not be specially compensated, may solicit proxies from our stockholders by telephone, facsimile or other electronic means or in person. Arrangements also will be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation materials to the beneficial owners of shares held of record by these persons, and we will reimburse them for their reasonable out-of-pocket expenses. We will bear the total cost of soliciting proxies.

We have retained Innisfree M&A Incorporated, a proxy solicitation firm, to assist us in the solicitation of proxies connection with the annual meeting. We will pay Innisfree a fee of $15,000 for its services. In addition, we may pay Innisfree additional fees depending on the extent of additional services requested by us and will reimburse Innisfree for expenses Innisfree incurs in connection with its engagement by us. In addition to the fees paid to Innisfree, we will pay all other costs of soliciting proxies.

Stockholders have the option to vote over the internet or by telephone. Please be aware that if you vote over the internet, you may incur costs such as telephone and access charges for which you will be responsible.

Q:

What is “Householding” and does Annaly do this?

A:

Householding is a procedure approved by the Securities and Exchange Commission under which stockholders who have the same address and last name and do not participate in electronic delivery of proxy materials receive only one copy of a company’s proxy statement and annual report from a company, bank, broker or other intermediary, unless one or more of these stockholders notifies the company, bank, broker or other intermediary that they wish to continue to receive individual copies. We engage in this practice, which is known as “householding,” as it reduces our printing and postage costs. However, if a stockholder of record residing at such an address wishes to receive a separate annual report or proxy statement, he or she may request it orally or in writing by contacting us at Annaly Capital Management, Inc., 1211 Avenue of the Americas, Suite 2902, New York, New York 10036, Attention: Investor Relations, by emailing us at investor@annaly.com, or by calling us at 212-696-0100, and we will promptly deliver to the stockholder the requested annual report or proxy statement. If a stockholder of record residing at such an address wishes to receive a separate annual report or proxy statement in the future, he or she may contact us in the same manner. If you are an eligible stockholder of record receiving multiple copies of our annual report and proxy statement, you can request householding by contacting us in the same manner. If you own your shares through a bank, broker or other nominee, you can request householding by contacting the nominee.

Q:

Could the Annual Meeting be postponed or adjourned?

A:

If a quorum is not present or represented, our bylaws permit a majority of stockholders entitled to vote at the annual meeting, present in person or represented by proxy, to postpone or adjourn the meeting, without notice other than an announcement.

10

Q:

Who can help answer my questions?

A:

If you have any questions or need assistance voting your shares or if you need additional copies of this proxy statement or the enclosed proxy card, you should contact:

Annaly Capital Management, Inc.

1211 Avenue of the Americas

Suite 2902

New York, NY 10036

Phone: (212) 696-0100

Facsimile: (212) 696-9809

Email: investor@annaly.com

Attention: Investor Relations

Our principal executive offices are located at 1211 Avenue of the Americas, Suite 2902, New York, New York 10036.

11

PROPOSAL 1

ELECTION OF DIRECTORS

At the annual meeting, the stockholders will vote to elect three class II directors, whose terms will expire at our annual meeting of stockholders in 2016, and one class III director, whose term will expire at our annual meeting of stockholders in 2014, subject to the election and qualification of their successors or to their earlier death, resignation or removal.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR KEVIN P. BRADY, E. WAYNE NORDBERG AND KEVIN G. KEYES AS DIRECTORS TO HOLD OFFICE UNTIL OUR ANNUAL MEETING OF STOCKHOLDERS IN 2016 AND UNTIL THEIR RESPECTIVE SUCCESSORS ARE DULY ELECTED AND QUALIFIED, AND FOR JOHN H. SCHAEFER AS A DIRECTOR TO HOLD OFFICE UNTIL OUR ANNUAL MEETING OF STOCKHOLDERS IN 2014 AND UNTIL HIS SUCCESSOR IS DULY ELECTED AND QUALIFIED. THE PERSONS NAMED IN THE ENCLOSED PROXY WILL VOTE YOUR PROXY IN FAVOR OF THESE NOMINEES UNLESS YOU SPECIFY A CONTRARY CHOICE IN YOUR PROXY.

Directors

We have three classes of directors. Our class I directors serve until our annual meeting of stockholders in 2015. Our class II directors elected at this year’s meeting will serve until our annual meeting of stockholders in 2016. Our class III directors, including the class III director elected at this year’s meeting, serve until our annual meeting of stockholders in 2014. Set forth below are the names and certain information on each of our directors.

Name

Age

Independent

Director Since

Primary Occupation

Committee Memberships

Class I Directors:

Wellington J. Denahan

49

No

January 1997

Our Chairman and CEO

None

Michael Haylon

55

Yes

June 2008

Managing Director, Head of Investment Products, Conning, Inc.

Audit

Nominating/Corporate Governance

Donnell A. Segalas

55

Yes

January 1997

CEO and Managing Partner, Pinnacle Asset Management L.P.

Compensation

Nominating/Corporate Governance

Class II Directors:

Kevin G. Keyes

45

No

November 2012

Our President

None

Kevin P. Brady

57

Yes

January 1997

CEO, ARMtech

Audit (Chair)

Nominating/Corporate Governance

E. Wayne Nordberg

74

Yes

May 2005

Chairman, Hollow Brook Wealth

Management LLC

Audit

Compensation (Chair)

Nominating/Corporate Governance

Class III Directors:

Jonathan D. Green

66

Yes

January 1997

Special Advisor, Rockefeller Group International, Inc.

Audit

Compensation

John A. Lambiase

73

No

January 1997

Retired, Managing Director, Salomon

Brothers

None

John H. Schaefer

61

Yes

March 2013

Retired, Financial Services

Executive

Audit (effective April 2, 2013)

Compensation (effective April 2, 2013)

12

Class I Directors

Wellington J. Denahan, age 49, is Chairman of the Board and Chief Executive Officer of Annaly. Ms. Denahan was appointed Chairman of the Board and Chief Executive Officer of Annaly in November 2012. Previously, Ms. Denahan was appointed to serve as Co-Chief Executive Officer of Annaly in October 2012. Ms. Denahan was elected in December 1996 to serve as Vice Chairman of the Board and a Chief Investment Officer of Annaly. Ms. Denahan was Annaly’s Chief Operating Officer from January 2006 to October 2012 and Chief Investment Officer from 2000 to November 2012. She was a co-founder of Annaly. Ms. Denahan has a Bachelor of Arts from Florida State University.

The board of directors believes that Ms. Denahan’s qualifications include, among other things, her significant oversight experience related to fixed income trading operations through years of serving as our Chief Operating Officer and Chief Investment Officer, her industry experience and expertise in the mortgage-backed securities markets, and her operational expertise.

Michael Haylon, age 55, was elected on June 12, 2008 to serve as a director. Since January 2012, Mr. Haylon has served as Managing Director, Head of Investment Products at Conning, Inc. From September 2010 to December 2011, Mr. Haylon served as Head of Investment Product Management at General Re – New England Asset Management. He was Chief Financial Officer of the Phoenix Companies, Inc. from 2004 until 2007, and Executive Vice President and Chief Investment Officer of the Phoenix Companies in 2002 and 2003. From 1995 until 2002, he held the position of Executive Vice President of Phoenix Investment Partners, Ltd. a NYSE-listed company, and President of Phoenix Investment Counsel, where he was responsible for the management and oversight of $25 billion in closed-end and open-end mutual funds, corporate pension funds and insurance company portfolios. From 1990 until 1994 he was Senior Vice President of Fixed-Income at Phoenix Home Life Insurance Company. From 1986 until 1990, he was Managing Director at Aetna Bond Investors where he was responsible for management of insurance company and pension fund portfolios. From 1980 until 1984 he was Senior Financial Analyst at Travelers Insurance Companies. He began his career in 1979 in the commercial lending program at Philadelphia National Bank. Mr. Haylon has previously served on the boards of Aberdeen Asset Management and Phoenix Investment Partners. He has a B.A. from Bowdoin College and a M.B.A. from the University of Connecticut.

The board of directors believes that Mr. Haylon’s qualifications include, among other things, his significant leadership and management experience from his years of management and oversight of large financial asset portfolios, his prior board experience with other companies and his expertise in financial matters. None of the corporations or organizations that have employed Mr. Haylon during the past five years is a parent, subsidiary or other affiliate of us.

Donnell A. Segalas, age 55, is the Chief Executive Officer and a Managing Partner of Pinnacle Asset Management L.P., a New York-based alternative asset management firm. Prior to joining Pinnacle in 2003, Mr. Segalas was Executive Vice President and Chief Marketing Officer for Alternatives at Phoenix Investment Partners. Mr. Segalas is also an appointed Director to certain of the Cayman Island based funds managed by Pinnacle. Mr. Segalas is a member of the Nantucket Historical Society. He received a B.A. from Denison University.

The board of directors believes that Mr. Segalas’s qualifications include, among other things, his significant experience from his years of investing and managing private and public investment vehicles and his experience serving on investment and executive committees with other companies. None of the corporations or organizations that have employed Mr. Segalas during the past five years is a parent, subsidiary or other affiliate of us.

13

Class II Directors

Kevin P. Brady, age 57, was elected on January 28, 1997 to serve as a director. Mr. Brady has served as an independent director of the Company since 1997 and is Chair of the Audit Committee, with oversight for financial disclosure, audit and general accounting activities. Mr. Brady is the Chief Executive Officer of ARMtech, a software company that he founded in 2007, which is dedicated to the financial reporting market. In January of 2008, ThomsonReuters acquired TaxStream, a software company founded by Mr. Brady. Prior to the acquisition, he served as Chief Executive Officer of TaxStream, providing product expertise, management and strategic direction for the company. Mr. Brady was awarded a patent from the U.S. Patent and Trademark Office (No. 7627504) for the invention of the TaxStream product. Mr. Brady worked in various accounting and tax positions at PricewaterhouseCoopers from 1986 to 1994 and Merck from 1980 to 1986. Mr. Brady holds a B.A. from McGill University, an M.B.A. from New York University and is a Certified Public Accountant (inactive).

The board of directors believes that Mr. Brady’s qualifications include, among other things, his expertise in financial and accounting matters as well as his significant experience managing systems and companies focusing on the financial accounting market. None of the corporations or organizations that have employed Mr. Brady during the past five years is a parent, subsidiary or other affiliate of us.

E. Wayne Nordberg, age 74, was elected on May 27, 2005 to serve as a director and is Chair of the compensation committee. Since 2008 he has served as Chairman of Hollow Brook Wealth Management LLC, a SEC registered investment advisor, which manages or advises $1.7 billion of investment assets, including the Lafayette College Endowment Fund. From January 2003 to November 2008, Mr. Nordberg served as a senior director of Ingalls & Snyder LLC, an NYSE member and registered investment advisor. From 1998 to June 2002, Mr. Nordberg served as Vice Chairman of the Board of KBW Asset Management, Inc. KBW is an affiliate of Keefe, Bruyette, & Woods, Inc., a registered investment advisor offering investment management services to institutions and high net worth individuals. From 1988 to 1998, he served in various capacities for Lord, Abbett & Co., a mutual fund company, including partner and director of their family of funds. Mr. Nordberg received his B.A. from Lafayette College, where he is a Trustee Emeritus. He is a member of the Financial Analysts Federation and The New York Society of Security Analysts and is a Trustee of the Atlantic Salmon Federation, The American Museum of Fly Fishing, The Anglers’ Club of New York, Glynwood Center and Yellowstone Park Foundation. Mr. Nordberg also serves on the Investment Committee of The Jackson Laboratory and the National Wildlife Federation Endowment Fund. Mr. Nordberg is also a director of PetroQuest Energy, Inc.and Reaves Utility Income Fund, both NYSE-listed companies.

The board of directors believes that Mr. Nordberg’s qualifications include, among other things, his significant experience in serving at a senior executive level with a SEC registered investment advisor, his experience as a director of an asset management company and his service as a board member of other public companies. None of the corporations or organizations that have employed Mr. Nordberg during the past five years is a parent, subsidiary or other affiliate of us.

Kevin G. Keyes, age 45, is President of Annaly and is also a member of the Board of Directors. Prior to being named to his current role, Mr. Keyes served as Chief Strategy Officer and Head of Capital Markets at Annaly. Mr. Keyes has over 20 years of Capital Markets and Investment Banking experience. He joined Annaly in 2009 from Bank of America Merrill Lynch where he served in various senior management and business origination roles since 2005. Prior to that, Mr. Keyes also worked at Credit Suisse First Boston from 1997 until 2005 in various capital markets roles and Morgan Stanley Dean Witter from 1990 until 1997 in various investment banking positions. Mr. Keyes has a B.A. in Economics and a B.S. in Business Administration (ALPA Program) from the University of Notre Dame.

The board of directors believes that Mr. Keyes’s qualifications include, among other things, his over 20 years of experience in investment banking and as an equity capital markets professional as well as his role in our operations management and oversight of our strategic planning and deep understanding of issues that are important to the Company’s growth.

14

Class III Directors

Jonathan D. Green, age 66, was elected on January 28, 1997 to serve as a director. Since January 2011, Mr. Green has served as a special advisor to Rockefeller Group International, Inc., a wholly owned subsidiary of Mitsubishi Estate Company, Ltd., with interests in real estate ownership, investment, management and development, and real estate services collectively operating under the brand of The Rockefeller Group. He joined The Rockefeller Group in 1980 as Assistant Vice President and Real Estate Counsel. In 1983 he was appointed Vice President, Secretary and General Counsel and in 1990 was elected Chief Corporate Officer. On July 6, 1995 he was named President and Chief Executive Officer of Rockefeller Group Development Corporation (RGDC) and Rockefeller Center Management Corporation (RCMC), both subsidiaries of The Rockefeller Group. In October 2002 Mr. Green was named President and Chief Executive Officer of Rockefeller Group International, Inc., becoming Vice Chairman in January 2009. He served as Vice Chairman until December 2010. In his role as Vice Chairman, Mr. Green was active in formulating the strategic planning for the company and its subsidiaries, which include Rockefeller Group Development Corporation, Rockefeller Group Investment Management, Rockefeller Group Technology Solutions, Inc. and Rockefeller Group Business Centers. Before joining The Rockefeller Group, Mr. Green was associated with the New York City law firm of Thacher, Proffitt & Wood. He also serves on the Board of Trustees of the Wildlife Conservation Society. Mr. Green graduated from Lafayette College and the New York University School of Law.

The board of directors believes that Mr. Green’s qualifications include, among other things, his significant experience as a chief executive of another company, his diverse and significant background in the real estate industry and his legal expertise. None of the corporations or organizations that have employed Mr. Green during the past five years is a parent, subsidiary or other affiliate of us.

John A. Lambiase, age 73, was elected on January 28, 1997 to serve as a director. Mr. Lambiase was managing director in global operations at Salomon Brothers from 1985 through his retirement in 1991. Mr. Lambiase joined Salomon in 1979 as director of internal audit. Mr. Lambiase has served as Chairman of the Mortgage-Backed Securities Clearance Corporation, a member of the board of directors of Prudential Home Mortgage and a member of the Board of the National Securities Clearance Corporation, and was a founding director and Chairman of the Participation Trust Company. Mr. Lambiase also served on Salomon’s Credit Committee. Prior to joining Salomon, from 1972 through 1979, Mr. Lambiase was President of Loeb Rhodes Wall Street Settlement Corporation with responsibility for securities clearance of over 130 member firms. Prior to Loeb Rhodes, Mr. Lambiase had been the Chief Financial Officer and a General Partner of W.E. Hutton. Mr. Lambiase is a Certified Public Accountant (inactive).

The board of directors believes that Mr. Lambiase’s qualifications include, among other things, his significant securities industry experience, his expertise in accounting matters and his service as a board member of other companies. None of the corporations or organizations that have employed Mr. Lambiase during the past five years is a parent, subsidiary or other affiliate of us.

John H. Schaefer, age 61, was appointed to serve as a director in March 2013. Mr. Schaefer has over 30 years financial services experience including serving as a member of the management committee of Morgan Stanley from 1998 through 2005 and as President and Chief Operating Officer of the Global Wealth Management division of Morgan Stanley. Mr. Schaefer retired in February 2006 and from 2008 through 2012 served as a board member and chair of the audit committee of USI Holdings Corporation. Mr. Schaefer has a B.B.A. in Accounting from the University of Notre Dame and an M.B.A. from the Harvard Graduate School of Business.

The board of directors believes that Mr. Schaefer’s qualifications include, among other things, his broad financial services management experience, including management of strategic planning, capital management, human resources, internal audit and corporate communications. None of the corporations or organizations that have employed Mr. Schaefer during the past five years is a parent, subsidiary or other affiliate of us.

15

CORPORATE GOVERNANCE, DIRECTOR INDEPENDENCE,

BOARD MEETINGS AND COMMITTEES

Corporate Governance

We believe that we have implemented effective corporate governance policies and observe good corporate governance procedures and practices. We have adopted a number of written policies, including corporate governance guidelines, code of business conduct and ethics and charters for our audit committee, compensation committee and nominating/corporate governance committee.

Board Oversight of Risk

The board of directors is responsible for overseeing our risk management practices and committees of the board of directors assist it in fulfilling this responsibility.

As required by its charter, the audit committee routinely discusses with management our significant risk exposures and the actions management has taken to limit, monitor or control such exposures, including guidelines and policies with respect to our assessment of risk and risk management. At least annually, the audit committee reviews with management our risk management program which identifies and quantifies a broad spectrum of enterprise-wide risks and related action plans. In 2012, our full board of directors participated in this review and discussion and expects to continue this practice as part of its role in the oversight of our risk management practices. In addition, our employees report to the audit committee on various matters related to our risk exposures on a regular basis or more frequently, if appropriate. At their discretion, members of the board of directors may also directly contact management to review and discuss any risk-related or other concerns that may arise between regular meetings. Our board of directors reviewed with our compensation committee its compensation policies and practices applicable to all employees that could affect our assessment of risk and risk management. Following such review, we determined that our compensation policies and practices for all employees do not create risks that are reasonably likely to have a material adverse effect on us. As part of this risk assessment and management activities going forward, our board of directors also determined that it would undertake an annual review of our compensation policies and practices as they relate to risk.

Independence of Our Directors

New York Stock Exchange rules require that at least a majority of our directors be independent of our company and management. The rules also require that our board of directors affirmatively determine that there are no material relationships between a director and us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us) before such director can be deemed independent. We have adopted independence standards consistent with New York Stock Exchange rules. Our board of directors has reviewed both direct and indirect transactions and relationships that each of our directors had or maintained with us, our management and employees. As a result of this review, our board of directors, based upon the fact that none of Kevin P. Brady, Jonathan D. Green, Michael Haylon, E. Wayne Nordberg, Donnell A. Segalas and John H. Schaefer have any relationships with us other than as directors and holders of our common stock, affirmatively determined that these six directors are independent directors under New York Stock Exchange rules. Wellington J. Denahan and Kevin G. Keyes are not considered independent because they are employees of the company, and John A. Lambiase is not considered independent because we employ his son. We do not have a lead independent director.

16

Board Leadership Structure

Wellington J. Denahan, one of our founders, is our Chairman of the Board and Chief Executive Officer. We believe that a combined Chairman of the Board and Chief Executive Officer position, together with independent directors serving as members in each of our board committees, and regularly scheduled sessions of the board and committees is the most appropriate board leadership structure for us at this time. Experienced and independent directors, sitting on various committees, oversee our operations, risks, performance and business strategy. Our board believes that for us, the combination of the Chairman of the Board and Chief Executive Officer positions takes advantage of Ms. Denahan’s talent and knowledge and effectively combines the responsibilities for strategy development and execution with management of day-to-day operations. We also believe it provides us with clear leadership lines and reduces the potential for confusion or duplication of efforts. Our board believes that given its strong governance practices, including the requirement that a majority of its members be independent of us, the combination of these two roles, provide an appropriate balance among strategy development, operational execution and independent oversight of us. This structure has served us well as we have built ourselves to be the largest REIT in our sector.

Board Committees and Charters

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics, which sets forth the basic principles and guidelines for resolving various legal and ethical questions that may arise in the workplace and in the conduct of our business. This code is applicable to all employees, officers and directors of the company.

Corporate Governance Guidelines

We have adopted Corporate Governance Guidelines which, in conjunction with the charters and key practices of our board committees, provide the framework for the governance of our company.

Other Charters

Our compensation committee, audit committee and nominating/corporate governance committee have also adopted written charters which govern their conduct.

Where You Can Find These Documents

Our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Compensation Committee Charter, Audit Committee Charter and Nominating/Corporate Governance Committee Charter are available on our website (www.annaly.com). We will provide copies of these documents free of charge to any stockholder who sends a written request to Investor Relations, Annaly Capital Management, Inc., 1211 Avenue of the Americas, Suite 2902, New York, New York 10036.

Compensation Committee

We have a standing compensation committee. The members of our compensation committee are E. Wayne Nordberg (Chair), Jonathan D. Green, Donnell A. Segalas, and John H. Schaefer (effective April 2, 2013) each of whom is an independent director within the meaning of the rules of the New York Stock Exchange. The compensation committee administers our 2010 Equity Incentive Plan, or Incentive Plan, and recommends changes to the Incentive Plan to our board of directors when appropriate. The compensation committee also administered our prior equity incentive plan, or the Prior Plan. The compensation committee also approves compensation for our officers. We refer to our Incentive Plan and our Prior Plan collectively as the Plan. For additional information on the compensation committee, please see “Compensation Discussion and Analysis” below.

17

Audit Committee

We have a standing audit committee. The members of our audit committee are Kevin P. Brady (Chair), Jonathan D. Green, Michael Haylon, E. Wayne Nordberg and John H. Schaefer (effective April 2, 2013). Each member of our audit committee is an independent director within the meaning of the rules of the New York Stock Exchange, and Mr. Brady has been designated as our audit committee’s financial expert. The audit committee recommends to our board of directors the engagement or discharge of independent registered public accountants, reviews the plan and results of the auditing engagement with our Chief Financial Officer and our independent registered public accountants, and reviews with our Chief Financial Officer the scope and nature of our internal auditing system. The activities of the audit committee are described in greater detail below under the caption “Report of the Audit Committee.”

Nominating/Corporate Governance Committee

We have a standing nominating/corporate governance committee. The members of our nominating/corporate governance committee are Michael Haylon, Donnell A. Segalas, Kevin P. Brady and E. Wayne Nordberg. Each of the members of our nominating/corporate governance committee meets the independence requirements of the New York Stock Exchange. Our nominating/corporate governance committee (i) recommends criteria for the selection of new directors, identifies individuals qualified to become board members and recommends to the board of directors persons to be nominated as directors or to be elected to fill vacancies on the board of directors; (ii) develops and recommends to the board of directors a set of corporate governance principles; (iii) provides oversight of the evaluation of the board of directors and management; and (iv) considers corporate governance matters, such as director retirement policies, succession plans for management and potential conflicts of interest of members of the board of directors and senior management and makes recommendations for change, as appropriate. Our nominating/corporate governance committee will consider nominees recommended by our stockholders. These recommendations should be submitted in writing to our Secretary.

Our nominating/corporate governance committee currently considers the following factors in making its recommendations to the board of directors: background, skills, expertise, accessibility and availability to serve effectively on the board of directors. Our nominating/corporate governance committee also conducts inquiries into the background and qualifications of potential candidates. Although the nominating/corporate governance committee does not have a formal diversity policy, it believes that diversity is an important factor in determining the composition of the board of directors. Additionally, the committee believes that it is critical to have a board of directors with diverse backgrounds in various areas as this contributes to our success and is in the best interests of our stockholders.

Our nominating/corporate governance committee uses a variety of methods for identifying and evaluating nominees for director. Our nominating/corporate governance committee regularly assesses the appropriate size of the board of directors, and whether any vacancies on the board of directors are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, our nominating/corporate governance committee considers various potential candidates for director. Candidates may come to the attention of our nominating/corporate governance committee through current members of our board of directors, professional search firms, stockholders or other persons. These candidates are evaluated at regular or special meetings of our nominating/corporate governance committee and may be considered at any point during the year. As described above, our nominating/corporate governance committee considers properly submitted stockholder nominations for candidates for the board of directors. Following verification of the stockholder status of persons proposing candidates, recommendations are aggregated and considered by our nominating/corporate governance committee at a regularly scheduled or special meeting. If any materials are provided by a stockholder in connection with the nomination of a director candidate, such materials are forwarded to our nominating/corporate governance committee. Our nominating/corporate governance committee also reviews materials provided by professional search firms or other parties in connection with a nominee who is not proposed by a stockholder. In evaluating such nominations, our nominating/corporate governance committee seeks to achieve a balance of knowledge, experience and capability on the board of directors.

18

Communications with the Board of Directors

Interested persons may communicate their comments, complaints or concerns by sending written communications to the board of directors, committees of the board of directors and individual directors by mailing those communications to:

Annaly Capital Management, Inc.

[Addressee*]

1211 Avenue of the Americas

Suite 2902

New York, NY 10036

Phone: (212) 696-0100

Facsimile: (212) 696-9809

Email: investor@annaly.com

Attention: Investor Relations

* Audit Committee of the board of directors

* Compensation Committee of the board of directors

* Nominating/Corporate Governance Committee of the board of directors

* Non-Management Directors

* Name of individual director

These communications are sent by us directly to the specified addressee.

We require each member of the board of directors to attend our annual meeting of stockholders except for absences due to causes beyond the reasonable control of the director. We had eight directors at the time of the 2012 annual meeting of stockholders and all eight attended the meeting.

Board and CommitteeMeetings

During 2012, our board of directors held eighteen meetings. During 2012, the compensation committee held five meetings, the audit committee held eight meetings, and the nominating/corporate governance committee held one meeting. Each director attended at least 75% of the aggregate number of meetings held by our board of directors and 75% of the aggregate number of meetings of each committee on which the director served.

Meetings of Non-Management Directors

Our corporate governance guidelines require that the board have at least two regularly scheduled meetings each year for our non-management directors. These meetings, which are designed to promote unfettered discussions among our non-management directors, are presided over by Kevin Brady, a non-management director. During 2012, our non-management directors had two meetings.

During 2012, our independent directors, Kevin P. Brady, Jonathan D. Green, Michael Haylon, E. Wayne Nordberg and Donnell A. Segalas, without the participation of board members who are members of management, held two meetings to discuss and consider the Management Externalization Proposal. The independent directors retained advisors, including a financial advisor and outside legal counsel, to assist in their work.

Kathryn F. Fagan is the Chief Financial Officer and Treasurer of the Company and FIDAC. Ms. Fagan was employed as Chief Financial Officer and Treasurer of Annaly in April 1997. From June 1, 1991 to February 28, 1997, Ms. Fagan was Chief Financial Officer and Controller of First Federal Savings & Loan Association of Opelousas, Louisiana. Ms. Fagan was employed as a bank and savings and loan auditor by John S. Dowling & Company, a corporation of Certified Public Accountants. Ms. Fagan has a Bachelor of Arts and a Masters Degree in Business Administration each from the University of Southwestern Louisiana.

James P. Fortescue was appointed to serve as to serve as Chief Operating Officer of Annaly and FIDAC in October 2012. Mr. Fortescue was previously Chief of Staff, Head of Liabilities and Managing Director of Annaly. Mr. Fortescue joined FIDAC in June of 1995. Mr. Fortescue’s responsibilities included overseeing FIDAC’s financing on mortgage-backed and corporate bonds, as well as maintaining a pricing service for a major broker dealer. In September of 1996, Mr. Fortescue assumed responsibility for overseeing financing activities for the U.S. Dollar Floating Rate Fund Ltd. Mr. Fortescue has been in charge of liability management for Annaly since its inception, and continues to oversee all financing activities for FIDAC. Mr. Fortescue has a Bachelors Degree in Finance from Siena College.

Rose-Marie Lyght was appointed to serve as Co-Chief Investment Officer of Annaly and FIDAC in November 2012. Ms. Lyght was previously a Managing Director of Annaly and Chief Investment Officer of FIDAC. She has been involved in the asset selection and financing for the investment vehicles managed by FIDAC. Ms. Lyght was employed by Annaly in April 1999. Ms. Lyght has a Bachelor of Science in Finance and a Masters Degree in Business Administration from Villanova University.

Kristopher R. Konrad was appointed to serve as to serve as Co-Chief Investment Officer of Annaly and FIDAC in November 2012. Mr. Konrad was previously a Managing Director and Head Portfolio Manager of Annaly. Mr. Konrad was the Portfolio Manager for Annaly and has served in this capacity since December of 2000. Prior to this, he was head of financing for the US Dollar Floating Rate Fund and assisted with the management of FIDAC’s high net worth separate accounts. Mr. Konrad was employed by us in October 1997. Mr. Konrad has a Bachelors Degree in Business from Ithaca College and has attended the New York Institute of Finance for intensive mortgage-backed securities studies.

R. Nicholas Singh is Chief Legal Officer and Secretary and of Annaly and FIDAC. Mr. Singh was employed by Annaly in February 2005. From 2001 until he joined Annaly, he was a partner in the law firm of McKee Nelson LLP. Mr. Singh has a Bachelors Degree from Carleton College, a Masters Degree from Columbia University and a J.D. from American University.

20

SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT OF ANNALY

The following table sets forth certain information as of March 11, 2013 relating to the beneficial ownership of our common stock by (i) our Chief Executive Officer, our Chief Financial Officer and each of the other three of our most highly compensated executive officers (the “named executive officers”), (ii) each of our directors, (iii) all of our executive officers and directors as a group and (iv) all persons that we know beneficially own more than 5% of our outstanding common stock. Knowledge of the beneficial ownership of our common stock is drawn from statements filed with the SEC pursuant to Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended. Except as otherwise indicated, to the best of our knowledge, each stockholder listed below has sole voting and investment power with respect to the shares beneficially owned by the stockholder.

Beneficial Owner(1)

Number

Percent

Wellington J. Denahan(2)

2,013,263

*

Kevin G. Keyes

200,000

*

Kathryn F. Fagan(3)

627,613

*

James P. Fortescue(4)

466,261

*

Kristopher R. Konrad(5)

451,183

*

Kevin P. Brady(6)

135,400

*

Jonathan D. Green(7)

202,000

*

Michael Haylon(8)

81,250

*

John Lambiase(9)

214,312

*

Donnell A. Segalas(10)

204,900

*

E. Wayne Nordberg(11)

188,500

*

John H. Schaefer

-

*

All executive officers and directors as a group (14 persons)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)

5,595,102

*

BlackRock, Inc.(12)

63,436,374

6.51

%

*

Represents beneficial ownership of less than one percent of the common stock.

(1)

The business address of each director and named executive officer is c/o Annaly Capital Management, Inc., 1211 Avenue of the Americas, Suite 2902, New York, New York 10036.

(2)

Includes 1,100,000 shares of common stock subject to options granted under the Incentive Plan to Ms. Denahan that were exercisable as of March 11, 2013 or have or will first become exercisable within 60 days after such date.

(3)

Includes 337,131 shares of common stock subject to options granted under the Incentive Plan to Ms. Fagan that were exercisable as of March 11, 2013 or have or will first become exercisable within 60 days after such date.

(4)

Includes 331,000 shares of common stock subject to options granted under the Incentive Plan to Mr. Fortescue that were exercisable as of March 11, 2013 or have or will first become exercisable within 60 days after such date.

(5)

Includes 273,500 shares of common stock subject to options granted under the Incentive Plan to Mr. Konrad that were exercisable as of March 11, 2013 or have or will first become exercisable within 60 days after such date.

(6)

Includes 91,250 shares of common stock subject to vested options granted under the Incentive Plan to Mr. Brady that were exercisable as of March 11, 2013 or have or will first become exercisable within 60 days after such date. Excludes 44,000 shares of common stock held by certain members of Mr. Brady’s immediate family for which he disclaims beneficial interest.

(7)

Includes 156,250 shares of common stock subject to options granted under the Incentive Plan to Mr. Green that were exercisable as of March 11, 2013 or have or will first become exercisable within 60 days after such date.

(8)

Includes 81,250 shares of common stock subject to options granted under the Incentive Plan to Mr. Haylon that were exercisable as of March 11, 2013 or have or will first become exercisable within 60 days after such date.

(9)

Includes 156,250 shares of common stock subject to options granted under the Incentive Plan to Mr. Lambiase that were exercisable as of March 11, 2013 or have or will first become exercisable within 60 days after such date.

(10)

Includes 128,750 shares of common stock subject to options granted under the Incentive Plan to Mr. Segalas that were exercisable as of March 11, 2013 or have or will first become exercisable within 60 days after such date.

(11)

Includes 126,250 shares of common stock subject to options granted under the Incentive Plan to Mr. Nordberg that were exercisable as of March 11, 2013 or have or will first become exercisable within 60 days after such date.

(12)

The address for this stockholder is 40 East 52nd Street, New York, NY 10022. The shares shown as beneficially owned by BlackRock, Inc. reflect shares owned on its own behalf and on behalf of the following subsidiaries: BlackRock Advisors, LLC; BlackRock Financial Management, Inc.: BlackRock Investment Management, LLC; BlackRock Investment Management (Australia) Limited; BlackRock (Luxembourg) S.A.; BlackRock (Netherlands) B.V.; BlackRock Fund Managers Limited; BlackRock Life Limited; BlackRock Asset Management Australia Limited; BlackRock Asset Management Canada Limited; BlackRock Asset Management Deutschland AG; BlackRock Asset Management Ireland Limited; BlackRock Advisors (UK) Limited; BlackRock Fund Advisors; BlackRock International Limited; BlackRock Institutional Trust Company, N.A.; BlackRock Japan Co. Ltd.; BlackRock Investment Management (UK) Limited; and iShares (DE) I InvAG mit Teilgesellschaftsvermogen. BlackRock, Inc. reported beneficially owning 63,436,374 shares of common stock with the sole power to vote or to direct the vote of 63,436,374 shares of common stock, the shared power to vote or to direct the vote of zero shares of common stock, the sole power to dispose or to direct the disposition of 63,436,374 shares of common stock and the shared power to dispose or to direct the disposition of zero shares of common stock. Based solely on information contained in a Schedule 13G filed by BlackRock, Inc. on January 30, 2013.

21

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This section explains, with respect to our 2012 fiscal year, our executive compensation philosophy, objectives, and design; our compensation setting process; our analysis of risk considerations in our executive compensation program; our executive compensation program components; and the decisions made with respect to the compensation of each of our named executive officers.

Our “named executive officers” for 2012, which consist of the executive officers who appear in the “Summary Compensation Table” below, are:

Michael A.J. Farrell, our co-founder and former Chairman of the Board, Chief Executive Officer and President.

If the Management Externalization Proposal is approved by our stockholders, our compensation structure will change significantly from that described in this Compensation Discussion and Analysis. For a description of the Management Externalization Proposal, see “Proposal 2 – Management Externalization Proposal.” Generally, if this proposal is approved by our stockholders, beginning on July 1, 2013, no compensation will be paid by us to any of our executive officers. Accordingly, the discussion below relates to our compensation programs during 2012 and, as applicable, 2013 through the period before the Management Externalization Proposal is implemented, if approved by our stockholders.

Overall Compensation Philosophy and Risk Considerations

Philosophy

Our principal business objective is to generate income for distribution to our stockholders as dividends. We believe that our compensation program is directly linked to our principal business objective of generating income to return to our stockholders. Our compensation program is designed to meet four principal goals:

●

attract, reward and retain skilled officers and other key employees who we believe will create and sustain stockholder value;

●

motivate these individuals to achieve corporate goals that protect and enhance stockholder value;

●

reward high levels of performance with commensurate levels of compensation; and

22

●

align the interests of our executives with those of our stockholders in our overall success.

To meet these objectives, we have adopted the following policies:

●

we pay compensation that we believe is competitive with the compensation paid by other leading asset management companies (including privately held companies and asset management funds, which we believe compete with us for management talent);

●

we pay for performance by structuring compensation so that the majority of cash compensation is comprised of discretionary bonuses linked directly to the value of our stockholders’ equity, subject to the approval of the compensation committee; and

●

we periodically provide long term incentives in the form of stock options to incentivize our employees and align their interests with those of our stockholders.

Risk Considerations

Our compensation committee, with the input of management, periodically reviews the risks and rewards associated with our compensation programs. Our compensation committee designs compensation programs with features that seek to mitigate risk without unduly diminishing the incentive nature of the compensation. We believe our programs encourage and reward a balance between prudent business judgment and appropriate risk-taking over the long term. Along these lines, with respect to specific elements of compensation:

●

We believe that base salary does not encourage risk-taking because it is a fixed amount that is not increased by virtue of any particular performance metric. In addition, base salary has traditionally been a smaller component of our executives’ overall compensation. However, we may allocate a greater portion of an executive’s total compensation to base salary instead of bonus than we have historically if we believe competitive pay trends generally warrant such an allocation.

●

Any bonus we pay our executives is principally based on the value of our stockholders’ equity. We believe that this structure disincentives our executives from causing us to take undue risks. For example, as discussed below, our executives can earn higher bonuses if our stockholders’ equity grows. However, the growth of our stockholders’ equity is dependent on our ability to regularly access the capital markets. We do not believe we will be able to regularly access the capital markets on favorable terms unless the markets believe our financial performance, and our executives’ management of risk, warrants it.

●

We periodically provide our executives with equity incentives. We view this component of compensation as an element of long term incentives, and consistent with this view, we place relatively long term vesting requirements on equity incentive grants. Such grants generally vest over three to five years. Vesting of these awards does not accelerate and is not otherwise dependent on any particular short term operational or financial event, which we believe mitigates undue risk taking by our executives.

Role of Stockholders’ Equity in Executive Compensation

Pursuant to our employment agreements with our named executive officers, each executive has a targeted aggregate cash compensation (comprised of a base salary and bonus) which is calculated as a percentage of the value of our stockholders’ equity, a metric we believe is key in creating stockholder value. Our stockholders’ equity is defined as the aggregate amounts reported on our balance sheet as “Stockholders’ Equity,” excluding any adjustments for valuation reserves (i.e., changes in the value of our portfolio of investments as a result of mark-to-market valuation changes). We believe the successful operation of our company by our executives is the principal driver of our stockholders’ equity, and that this approach is particularly appropriate since we are a REIT. REIT regulations require us to pay at least 90% of our earnings to stockholders as dividends. Thus, unlike most companies, we cannot grow our stockholders’ equity by reinvesting our earnings. Rather, growth in our stockholders’ equity is largely dependent on regular access to the capital markets. This places a unique discipline on our executives because if the capital markets do not approve of their operation of our company, we are unlikely to be able to regularly access the capital markets on favorable terms (which would limit our ability to increase our stockholders’ equity, and, correspondingly, each executive’s ability to reach the targeted aggregate cash compensation included in his or her employment agreement). We believe that many stockholders who invest in mortgage REITs like us view growth in stockholders’ equity as a significant performance metric.

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The percentage of our stockholders’ equity used as the multiplier to derive the targeted aggregate cash compensation set forth in the employment agreement for each named executive officers is as follows: Ms. Denahan: 0.25%; Mr. Keyes: 0.04%; Ms. Fagan: 0.10%; Mr. Fortescue: 0.05%; Mr. Konrad: 0.05%; and Mr. Farrell: 0.25% (each of these percentages is referred to as the “stockholders’ equity multipliers”). The compensation committee and the executives have periodically amended the employment agreements to revise the stockholders’ equity multiplier in order to reflect changing roles and responsibilities.

Competitive Pay Assessment

The compensation committee believes that the use of the stockholders’ equity multipliers has allowed the company to attract and retain skilled executives, one of our key goals, through providing appropriately competitive compensation opportunities tied to an important metric for our long term growth and stockholder success.

In order to evaluate the competitiveness of our compensation program, during 2012 the compensation committee engaged Frederic W. Cook & Co., Inc. (F.W. Cook), an independent compensation consultant, to perform a competitive review of our executive compensation practices. F.W. Cook compared compensation earned by our CEO and other named executive officers for 2011 and during the 2009-2011 period against certain internally managed and externally managed REITs and to certain other non-REIT asset management and financial services companies. In its discussion of comparisons to externally managed REITs, the F.W. Cook report stated that compared to externally managed REIT management/incentive fees and other compensation and benefits expense, our aggregate compensation and benefits expense as a percentage of average total assets and average stockholders’ equity was below the median. The report stated that, with respect to certain internally managed and externally managed REITs, total named executive officer cash compensation during these periods was high, but when viewed as a percentage of key metrics such as average stockholders’ equity and stockholder value creation, the amount of our executive compensation was relatively low primarily because we are much larger than those REITs. The F.W. Cook report was used by the compensation committee in formulating its view that our executive compensation program has facilitated our ability to retain high quality executives in a relatively efficient manner when compensation levels are viewed in the aggregate against various peers, especially when taking into account value creation for our stockholders over time.

In addition to the information provided by F.W. Cook, our management provided the compensation committee with reports and comparisons of our compensation against that of executives in similar positions at entities with whom we compete for hiring and retaining executive talent. While the compensation committee considered the F.W. Cook report and information prepared by our management in determining executive officer compensation, it did not benchmark our executive compensation to any particular level in these respective peer groups.

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The following highlights some of the key finding from F.W. Cook’s review.

Comparisons to Internally Managed REITs

The internally managed REITs F.W. Cook identified as a peer group were the following eight large residential and commercial mortgage REITs:

** CYS Investments, Inc. became an internally managed REIT on September 1, 2011

Although these companies are the largest internally managed mortgage REITs, they are still significantly smaller than Annaly in most financial size measures, including total assets, stockholders’ equity, and market capitalization.

The table below sets forth F.W. Cook’s presentation with respect to the relative position of our CEO’s and named executive officers’ (NEO) compensation compared with these internally managed REITs using the following metrics: actual dollar amount and as percentages of total assets, average stockholders’ equity, market capitalization, and 3-year stockholder value creation. The F.W. Cook report indicated that while our aggregate CEO and other NEO compensation was the highest compared to this peer group, when compensation was measured as a percentage of our average total assets, average stockholders’ equity, market capitalization, and 3-year stockholder value creation, it fell below the median level in each instance and below the 25th percentile in almost every instance:

Metric

CEO Compensation

(2011)

Other NEO

Compensation

(2011)

CEO Compensation

(2009-2011)

Other NEO

Compensation

(2009-2011)

Actual ($) dollars

Highest

Highest

Highest

Highest

As % of average total assets

Between 25th percentile and median

Between 25th percentile and median

Lower quartile

Below the minimum

As % of average stockholders’ equity

Lower quartile

Between 25th percentile and median

Lower quartile

Lower quartile

As % of market capitalization

Lower quartile

Lower quartile

Lower quartile

Lower quartile

As % of 3-year stockholder value creation

NA*

NA*

Lower quartile

Lower quartile

*

Because many of the internally managed REITs did not have positive stockholder value creation for 2011, comparisons of 2011 (one-year) compensation as a percentage of stockholder value creation were not meaningful. However, our company’s 2011 stockholder value creation was the highest of any company in the peer group.

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Comparison to Large Externally Managed Mortgage REITs

F.W. Cook also compared our aggregate compensation and benefits expense to the management and incentive fees and other compensation and benefits paid to the management companies of the following eight largest externally managed mortgage REITs (excluding Chimera Investment Corporation, which is externally managed by our subsidiary, FIDAC):

●

American Capital Agency Corp.

●

Newcastle Investment Corp.

●

ARMOUR Residential REIT, Inc.

●

PennyMac Mortgage Investment Trust

●

Hatteras Financial Corp.

●

Starwood Property Trust, Inc.

●

Invesco Mortgage Capital Inc.

●

Two Harbors Investment Corp.

Externally managed mortgage REITs are typically paid a management fee based on a percentage of stockholders’ equity, with a minority paid incentive fees or some additional compensation that is not included in management fees. Data are not available on the distribution of aggregate fees to individual management company executives for externally managed REITs. F.W. Cook determined that in 2011, the total compensation paid by Annaly ranked it (i) sixth in this group in terms of aggregate compensation as a percentage of total assets, and (ii) seventh in terms of aggregate compensation as a percentage of average stockholders’ equity. F.W. Cook noted, however, that if Annaly were externally managed, the aggregate compensation as a percentage of average stockholders’ equity would be in line with market practices.

Comparison to Non-REIT Asset Management and Financial Services Firms

F.W. Cook also compared our CEO and named executive officers’ compensation and benefits expense with the following fourteen non-REIT asset management firms and six financial services firms:

Asset Management firms:

●

Affiliated Managers

●

Eaton Vance

●

AllianceBernstein

●

Federated Investors

●

American Capital Ltd.

●

Invesco

●

Ameriprise Financial

●

Janus Capital Group

●

Apollo Global Management

●

KKR

●

Blackrock

●

Legg Mason

●

Blackstone Group

●

T. Rowe Price

Financial Services firms:

●

Aflac

●

MetLife

●

Charles Schwab

●

Prudential Financial

●

Loews

●

Travelers

Asset management firm sizes for these firms range from $75 billion to $678 billion in assets under management (AUM) plus Blackrock with $3.5 trillion in AUM and financial services firms include large financial services firms that were not participants in the TARP program. With regard to those firms, in some categories (including compensation measured in dollar terms), our compensation ranked highest, or one of the highest, in the group. In other categories, including CEO compensation and named executive officer compensation as a percentage of AUM, stockholders’ equity, market capitalization and stockholder value created, we ranked at or below the median compared to asset management firms. We ranked almost always near the highest level compared with the financial services firms.

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Other Compensation Factors and Role of CEO

While the targeted aggregate cash compensation is largely driven by the value of our stockholders’ equity, all bonuses must be approved by the compensation committee, and the compensation committee may consider other subjective factors when making compensation decisions. There is no formula for these factors, nor is one factor pre-determined to be given more weight than another. These factors may relate to our overall financial performance (such as AUM, earnings per share, profitability and overall economic conditions) or the performance of the individual executive (such as individual efforts, increased responsibility, demonstration of strong leadership, long term vision, effective execution and management capabilities).

Individual performance assessments for each executive officer are determined at the discretion of the compensation committee in close consultation with our CEO (except when her own performance assessment is being determined). The CEO’s executive officer performance assessment recommendations are generally based on an overall subjective assessment of each officer’s performance, and no single factor was determinative in recommending bonus levels nor was the impact of any individual factor on the bonus quantifiable. The compensation committee values the CEO’s consultation with respect to executive compensation, given her knowledge of each officer’s overall responsibilities and contributions to the company.

We discuss in more detail below the additional factors that were considered material by the compensation committee in making 2012 compensation decisions.

2012 Compensation Determinations

During 2012, F.W. Cook also examined the design of our executive compensation program and discussed with the compensation committee alternative approaches to short term cash and long term equity incentive components with pre-determined, quantitative performance objectives. In light of the illness and ultimate death of Mr. Farrell during 2012, however, the compensation committee determined that stockholder interests were best served by preserving continuity of our leadership, and that this could best be accomplished by not making any significant changes to the compensation program for 2012, although amounts paid to our named executive officers were reduced in some instances. In addition, the compensation committee considered the support for our compensation program illustrated by the 2011 “say-on-pay” vote. See “Consideration of “Say on Pay” and “Say on Frequency” Voting Results” below. Accordingly, for 2012, the principal components of compensation for our named executive officers continued to be base salary and cash bonuses.

2012 Base Salary

We pay a base salary to our named executive officers to compensate them for services rendered during the fiscal year. The compensation committee from time to time reviews the base salaries we pay our executives. Base salary for named executive officers are determined for each executive based, in part, on his or her position and responsibility, by reference to market data, internal pay equity considerations and the individual performance of the executive. Consistent with our pay-for-performance philosophy, base salary has traditionally been a much smaller component of our executives’ overall compensation, and that trend continued in 2012.

For 2012, the annual rate of base salary for each named executive officer was as follows: Ms. Denahan, $3,000,000; Mr. Keyes, $750,000; Ms. Fagan, $1,200,000; Mr. Fortescue, $750,000; and Mr. Konrad, $750,000. Mr. Farrell received base salary at the annual rate of $3,000,000 through the date of his death. These base salary rates were unchanged from 2011 and remained unchanged throughout 2012.

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2012 Bonus Compensation

In determining 2012 bonus compensation, the compensation committee considered (i) the target total compensation amounts per the applicable stockholders’ equity multipliers under the executive employment agreements, (ii) the F.W. Cook report noted above, (iii) individual performance factors noted below and (iv) recommendations of management. In particular, management recommended total compensation levels for 2012 below the target amounts determined under the stockholders’ equity multiplier for each of the named executive officers, other than for Mr. Keyes and Mr. Farrell. In reaching its decision, the compensation committee used its informed judgment taking into account the information presented to the committee in its entirety without applying formulas or specific weightings.

The following table summarizes the 2012 cash bonus amounts that the compensation committee awarded to each of our named executive officers (other than Mr. Farrell):

Name

Base

Salary

Actual Bonus

Awarded

Actual Total

Compensation

Targeted Total Compensation(1)

Percentage(2)

Wellington J. Denahan

$

3,000,000

$

22,800,000

$

25,800,000

$

39,158,263

66

%

Kevin G. Keyes

$

750,000

$

6,240,000

$

6,990,000

$

6,265,322

112

%

Kathryn F. Fagan

$

1,200,000

$

8,100,000

$

9,300,000

$

15,663,305

59

%

James P. Fortescue

$

750,000

$

6,240,000

$

6,990,000

$

7,831,653

89

%

Kristopher R. Konrad

$

750,000

$

5,540,000

$

6,290,000

$

7,831,653

80

%

(1) Per stockholders’ equity multiplier.

(2) Actual/Targeted Total Compensation.

For 2012, under Mr. Farrell’s employment agreement, we were required to pay his estate a pro rata portion of his total compensation, including bonus, based on his stockholders’ equity multiplier. As shown in the Summary Compensation Table, the amount of this contractually required pro rata bonus for 2012 was $29,516,175.

The individual performance factors considered by the compensation committee in determining 2012 bonuses for the named executive officers (other than Mr. Farrell) were as follows:

Wellington J. Denahan. The compensation committee considered Ms. Denahan’s leadership and long term vision for the company, particularly in light of the additional responsibilities she assumed during Mr. Farrell’s illness and following his death, and her promotion to Chairman of the Board and Chief Executive Officer.

Kevin G. Keyes. The compensation committee considered Mr. Keyes’ contributions in successfully designing and managing our capital markets activities in 2012 at significant cost savings to us (particularly in light of the importance of our company’s ability to regularly access the capital markets on favorable terms). The compensation committee also considered his strategic leadership in building our businesses, the strong demand for the services of experienced capital markets executives such as Mr. Keyes, and his promotion to President and being elected as a member of our board of directors. Given these competitive demands and increased responsibilities, the compensation committee believes that Mr. Keyes’ current stockholders’ equity multiplier in his employment agreement is lower than it should be. Consequently, the compensation committee agreed with management’s recommendation that Mr. Keyes receive total compensation for 2012 that exceeded his target amount.

James P. Fortescue. The compensation committee considered Mr. Fortescue’s contributions in managing our liabilities and overseeing the expansion of our new businesses, including our warehouse lending and broker-dealer subsidiaries. The compensation committee also considered his promotion to Chief Operating Officer.

Kristopher R. Konrad. The compensation committee considered Mr. Konrad’s contributions as Managing Director and Head Portfolio Manager and his promotion to Co-Chief Investment Officer of the Company.

Other Elements of Executive Compensation

Long Term Equity Incentive Compensation

The compensation committee periodically awards our executive officers with long term incentive compensation, historically in the form of stock option awards under our management stock incentive plan, to further align their interests with the long term interests of our stockholders. The compensation committee does not use a specific formula to calculate the number of options awarded to executives, nor does the compensation committee set future award levels/opportunities on the basis of what the executives earned from prior awards. While the compensation committee takes past awards into account, it does not solely base future awards in view of those past awards. Generally, our chief executive officer will recommend the amounts of awards to be made to each employee to the compensation committee. In determining the specific amounts to be granted to each employee, our compensation committee will take into account factors such as the executive’s position, his or her contribution to our performance, market practices as well as the recommendations of our chief executive officer. Historically, stock options have been subject to a vesting schedule, generally from three to five years. No stock options or other equity incentive awards were made to our executive officers in 2012.

Presently, we do not have designated dates on which we grant stock option awards (other than an annual grant to our directors). We do not, however, intend to time stock options grants with our release of material nonpublic information for the purpose of affecting the value of executive compensation.

Perquisites and Fringe Benefits; Payments Upon Termination

We do not believe in providing our executives with excessive perquisites and other fringe benefits. Consistent with our pay-for-performance mandate, we provide very few executive fringe benefits. Our named executive officers receive health and welfare benefits, such as group medical, group life and long term disability coverage, under plans generally available to all other employees. We believe that our executives should be able to provide for their retirement needs from the total annual compensation they earn based on our performance. Accordingly, other than an employer matching contribution under our Section 401(k) plan which is the same that we provide all of our employees, we do not offer our executives any nonqualified pension plans, supplemental executive retirement plans, deferred compensation plans or other forms of compensation for retirement.

Pursuant to the employment agreements, the named executive officers are also entitled to participate in our benefit plans, including the Plan. In addition, our board of directors has established a bonus incentive compensation plan for our executive officers. This program permits our compensation committee, in its discretion, to award cash bonuses annually to our executive officers. Each employment agreement also provides for the subject officer to receive compensation, in the event that we terminate the officer’s employment without “cause” (as defined in the agreement), or if the officer resigns for “good reason” (as defined in the agreement). We describe the severance benefits our named executives receive, as well as definitions of “good reason” and “cause,” in “Potential Payments Upon Termination of Employment” below. The employment agreements do not necessarily require payments by us upon a change of control of us, unless the change of control includes the failure of our successor to agree to perform its obligations under the employment agreement. In such a case, the executive would have “good reason” to terminate the agreement and require us to make severance payments.

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Each employment agreement also contains a “non-compete” provision prohibiting the officer from managing, controlling, participating in or operating a competing REIT for a period of one year following termination of employment following our termination of the officer for cause or resignation of the subject officer other than for “good reason.” Each agreement requires that the officer act in accordance with provisions of Maryland law relating to corporate opportunities.

Tax Considerations

Section 162(m) of the Internal Revenue Code denies a tax deduction for compensation in excess of $1 million paid to our Chief Executive Officer and our three other most highly compensated officers, excluding the Chief Financial Officer, unless the compensation is paid under a program that has satisfied stockholder approval requirements and the compensation is “performance-based” within the meaning of Section 162(m). Currently, the employment agreements of these officers do not contain performance-based criteria and the compensation program has not been approved by our stockholders. As a result, portions of the compensation we pay are subject to the $1 million deduction limitation because it is not considered performance-based within the meaning of Section 162(m).

As noted above, the compensation committee has traditionally believed that it is in the best interests of us and our stockholders that the overall compensation of our officers be primarily based on a percentage of our stockholders’ equity. Nevertheless, in view of the non-deductibility of a portion of the compensation we pay, the compensation committee reviews, from time to time, its policies to determine whether we should in the future add performance-based criteria to executive compensation. Adding performance-based criteria will require amending the existing employment agreements of the applicable employees.

Consideration of “Say on Pay” and “Say on Frequency” Voting Results

We did not hold a “say-on-pay” advisory vote at our 2012 annual meeting because our board of directors determined after the 2011 annual meeting to hold this vote every three years.

At the 2011 annual meeting, over 75% of votes cast by our stockholders were in favor of our executive compensation program. Given this strong support, no significant changes were made to the executive compensation program for 2012, nor could any material changes have been unilaterally made during 2012 given that our executive compensation is principally based on a percentage of our stockholders’ equity as set forth in employment agreements with the named executive officers, as described above.

We did, however, engage with certain of our key stockholders in 2012. As a result of those discussions, our board of directors determined to begin holding the “say-on-pay” advisory vote on an annual basis beginning with the 2013 annual meeting.

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Compensation Committee Report

The compensation committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

E. Wayne Nordberg (Chair) Jonathan D. Green Donnell A. Segalas

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Summary Compensation Table

The table below sets forth the aggregate compensation we paid or accrued with respect to the fiscal years ended December 31, 2012, 2011 and 2010, to our former Chief Executive Officer, our Chief Executive Officer and our Chief Financial Officer, and our three highest paid other executive officers serving in their positions at December 31, 2012 (our “named executive officers”).

Name and Principal Position

Year

Salary

Bonus

All Other

Compensation(1)

Total

Wellington J. Denahan

2012

$

3,000,000

$

22,800,000

$

10,129

$

25,810,129

Chairman and

2011

$

3,000,000

$

32,000,000

$

9,956

$

35,009,956

Chief Executive Officer

2010

$

2,715,000

$

20,909,832

$

9,968

$

23,634,800

Kevin G. Keyes

2012

$

750,000

$

6,240,000

$

129

$

6,990,129

President and

2011

$

750,000

$

6,350,000

$

9,956

$

7,109,956

Director

2010

$

625,000

$

4,421,223

$

9,968

$

5,056,191

Kathryn F. Fagan

2012

$

1,200,000

$

8,100,000

$

10,129

$

9,310,129

Chief Financial Officer and

2011

$

1,200,000

$

12,750,000

$

9,956

$

13,959,956

Treasurer

2010

$

1,086,000

$

8,363,933

$

9,968

$

9,459,901

James P. Fortescue

2012

$

750,000

$

6,240,000

$

10,129

$

7,000,129

Chief Operating Officer

2011

$

750,000

$

6,350,000

$

9,956

$

7,109,956

2010

$

625,000

$

4,091,766

$

9,968

$

4,726,734

Kristopher R. Konrad

2012

$

750,000

$

5,540,000

$

10,129

$

6,300,129

Co-Chief Investment Officer

2011

$

750,000

$

6,350,000

$

9,956

$

7,109,956

2010

$

625,000

$

4,091,766

$

9,968

$

4,726,734

Michael A.J. Farrell

2012

$

2,500,000

$

29,516,175

$

109

$

32,016,284

Former Chairman, Chief

2011

$

3,000,000

$

32,000,000

$

156

$

35,000,156

Executive Officer, and President

2010

$

2,715,000

$

20,909,832

$

168

$

23,625,000

(1)

The amounts shown in this column reflects for each named executive officer:

●

matching contributions of $10,000 were made by us with respect to each of the named executive officers pursuant to our Section 401(k) plan, other than to Mr. Farrell and Mr. Keyes who did not participate in the plan.

●

the premiums associated with term life insurance that we provide to our named executive officers.

We have in effect employment agreements with each of our named executive officers. The employment agreements set forth minimum base salary amounts and provide each executive with a targeted aggregate compensation which is calculated as a percentage of our stockholders’ equity. We describe these employment agreements in “Compensation Discussion and Analysis” above. We describe the severance payments we may pay to these executives in “Potential Payments Upon Termination Of Employment” below.

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Grants of Plan-Based Awards

We did not grant our named executive officers any plan based awards in 2012. We describe our Plan in “Compensation Discussion and Analysis” above and in “Equity Compensation Plan Information” below.

Outstanding Equity Awards at Fiscal Year-End

The following table provides information about outstanding equity awards of our named executive officers as of the end of 2012.

All options listed above vest beginning on the first anniversary of date of grant at a rate of 25% per year over the first four years of the ten-year option term.

(2)

These options vest on April 22, 2013.

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Options Exercised and Stock Vested

The following table sets forth certain information with respect to our named executive officers regarding options exercised and stock vested during the calendar year 2012.

Name

Number of Shares

Acquired on Exercise(#)

Value Realized on Exercise($)

Wellington J. Denahan

100,000

$

288,000

Kevin G. Keyes

-

-

Kathryn F. Fagan

54,869

$

152,675

James P. Fortescue

30,000

$

91,600

Kristopher R. Konrad

30,000

$

87,250

Michael A.J. Farrell

276,025

$

507,907

Pension Benefits

We do not provide any of our employees with pension benefits. We do, however, make matching contributions to all our employees, including our named executive officers, who contribute to our Section 401(k) plan. We make a matching contribution in cash of 100% of the employee’s elective deferral contribution up to 3% of the employee’s pay, and 50% of the employee’s pay above 3% up to 5% of the employee’s pay (subject to IRS limits).

Nonqualified Deferred Compensation

We do not provide any of our employees with any nonqualified deferred compensation plans.

Potential Payments Upon Termination Of Employment

The following summaries set forth potential payments payable to our named executive officers upon termination of employment or a change in control of us under their current employment agreements. As discussed above, each of our named executives has an employment agreement which provides for an annual base salary and performance bonus which in the aggregate equal a percentage of our stockholders’ equity. Post employment payments to our executives are determined by reference to their base salary and performance bonus.

Termination upon Death, Disability or for Cause

An executive’s employment with us terminates immediately upon his death. Thereafter, we are obligated to pay his estate all accrued but unpaid amounts of his base salary and the pro rata portion of his performance bonus for the year of his death. The amount of the performance bonus paid in the year of an executive’s death will equal the maximum performance bonus he would have been entitled to receive for that year (as determined at the end of the year of his death) multiplied by a ratio equal to the number of days he was employed in the year of his death, divided by 365. The performance bonus will be paid at the same time and manner had the executive not died. In addition, the executive’s beneficiaries will receive benefits in accordance with the Company’s retirement, insurance and other applicable programs and plans then in effect.

We are entitled to terminate an executive’s employment due to his disability if he has been absent from the full-time performance of his duties with the Company for six consecutive months, and if, within thirty days after written notice by us, he has not returned to the full-time performance of his duties. We will continue to pay the executive’s base salary during the period that the executive is first absent from the full-time performance of his duties and until the later of the date he is terminated from employment due to disability or the date he begins receiving long term disability payments under our long term disability plan. In addition, the executive will be entitled to receive a pro rata portion of the performance bonus for the year of the executive’s termination due to disability. The amount of the pro rata portion of the performance bonus will be determined in the same manner as described above upon termination upon an executive’s death.In addition, the executive’s beneficiaries will receive benefits in accordance with the Company’s retirement, insurance and other applicable programs and plans then in effect.

34

If we terminate an executive’s employment for “cause” at any time prior to expiration of the term of the agreement, we will be obligated to pay him all accrued but unpaid amounts of his base salary and the pro rata portion of his performance bonus for the year of his termination. The amount of the pro rata portion of the performance bonus will be determined in the same manner as described above upon termination upon an executive’s death.In addition, the executive’s beneficiaries will receive benefits in accordance with the Company’s retirement, insurance and other applicable programs and plans then in effect.

Termination by Us Other Than for Cause or Termination by the Executive for Good Reason

If we terminate an executive’s employment without “cause,” or if the executive officer resigns for “good reason”, we must immediately pay any unpaid portion of the executive’s base salary. In addition, the executive is entitled to receive a severance payment equal to three times the greater of (i) the executive’s combined maximum base salary and actual performance bonus for the preceding fiscal year or (ii) the average for the three preceding years of the officer’s combined actual base salary and performance bonus compensation. One half of this severance amount is payable immediately and the remaining 50% is payable in monthly installments over the succeeding three months.

If any payments, distributions, or benefits provided or to be provided to the executive under the employment agreement or otherwise are determined to be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code on payments related to a change in control (or parachute payments), each employment agreement provides that such parachute payments will be reduced to an amount that will avoid imposition of such excise taxes. However, the parachute payments will not be reduced if it is determined that the officer would have a greater net after-tax benefit after paying the applicable excise taxes on the unreduced parachute payments. If the parachute payments are not reduced under the terms of the employment agreements, Section 280G of the Code may limit our ability to deduct such payments for Federal income tax purposes.

In addition, if we terminate without cause or if the executive terminates for good reason, all unexercised stock options owned by the executive as of the termination date, whether vested or not, become immediately exercisable. If however, any incentive stock options will not be exercisable for the first time in a calendar year to the extent that all incentive stock options exercisable by the executive during that calendar year exceeds $100,000.

Termination by Executive Without Good Reason

If the executive terminates the agreement without good reason, we are obligated to pay him or her only all accrued but unpaid amounts of his base salary and any previously awarded but unpaid performance bonus.

Potential Post-Employment Payments and Payments on a Change in Control

Each of our named executives has the right to terminate employment for “good reason” and receive severance payment from us. We are not necessarily required to make payments to an executive upon a change of control of us, unless the change of control includes the failure of our successor to agree to perform its obligations under the employment agreement. Such an event would constitute “good reason” for purposes of the executive’s right to terminate the agreement and receive severance payments.

35

The following table presents the potential post employment payments and payments our named executive officers would be entitled under their employment agreements and assumes that the triggering event took place on December 31, 2012. Michael A.J. Farrell passed away on October 21, 2012 and the payments made under his employment agreement related to his passing are set forth under “2012 Bonus Compensation” in this proxy statement.

Name

Benefit

Termination with

Cause or

Voluntary

Termination

Termination

without Cause or

for Good Reason

Death or

Disability

Other Post

Employment

Obligations

Wellington J. Denahan

Base Salary

$

0

$

9,000,000

$

0

$

0

Bonus

$

0

$

68,400,000

$

0

$

0

Stock Options(1)

$

0

$

79,000

$

0

$

0

Total

$

0

$

77,479,000

$

0

$

0

Kevin G. Keyes

Base Salary

$

0

$

2,250,000

$

0

$

0

Bonus

$

0

$

18,720,000

$

0

$

0

Stock Options(1)

$

0

$

0

$

0

$

0

Total

$

0

$

20,970,000

$

0

$

0

Kathryn F. Fagan

Base Salary

$

0

$

3,600,000

$

0

$

0

Bonus

$

0

$

24,300,000

$

0

$

0

Stock Options(1)

$

0

$

29,625

$

0

$

0

Total

$

0

$

27,929,625

$

0

$

0

James P. Fortescue

Base Salary

$

0

$

2,250,000

$

0

$

0

Bonus

$

0

$

18,720,000

$

0

$

0

Stock Options(1)

$

61,225

$

90,850

$

61,225

$

0

Total

$

61,225

$

21,060,850

$

61,225

$

0

Kristopher R. Konrad

Base Salary

$

0

$

2,250,000

$

0

$

0

Bonus

$

0

$

16,620,000

$

0

$

0

Stock Options(1)

$

15,800

$

45,425

$

15,800

$

0

Total

$

15,800

$

18,915,425

$

15,800

$

0

(1)

We have valued the benefit based on the potential gain executives would have realized if the stock options had been exercised as of December 31, 2012.

36

COMPENSATION OF DIRECTORS

In 2012, we paid an annual director’s fee equal to $100,000 to each director who is not an officer or employee, as well as a fee of $500 for each meeting of our board of directors or any committee attended by each independent director (or $250 for any meeting at which the director participates by conference telephone call). We also reimbursed all directors for costs and expenses for attending these meetings.

For the year 2012 and prior years, each non-employee director, upon appointment to our board of directors, received a non-discretionary automatic grant of non-qualified stock options for the purchase of 5,000 shares of common stock; these options vest in four equal installments over a period of four years from the date of grant. In addition, each non-employee director is entitled to receive for each year that he or she serves as a director, options to purchase an additional 1,250 shares of common stock; these options vest on the date of grant. The exercise price for each option is the fair market value of our common stock as of the date on which the option is granted. Non-employee directors also are entitled to receive discretionary awards under the Plan.

Director Compensation

The table below summarizes the compensation paid by us to our non-employee directors for the fiscal year ended December 31, 2012.

Name

Fees Earned or

Paid in Cash($)

Option

Awards($)(1)

Total($)

Kevin P. Brady

105,750

0

105,750

Jonathan D. Green

107,000

0

107,000

Michael Haylon

106,250

0

106,250

John A. Lambiase

105,000

0

105,000

E. Wayne Nordberg

106,000

0

106,000

Donnell A. Segalas

105,250

0

105,250

(1)

Amounts shown in this column represent the aggregate grant date fair value of stock option awards granted during the respective year computed in accordance with Financial Accounting Standards Board ASC Topic 718. For the assumptions regarding determination of the grant date fair value of stock options, see Note 11 to our Consolidated Financial Statements for the 2012 fiscal year included in our Form 10-K filed with the SEC on February 26, 2013. As of December 31, 2012, each non-employee director has the following number of options outstanding: Kevin P. Brady, 91,250; Jonathan D. Green, 156,250; Michael Haylon, 81,250; John A. Lambiase, 156,250; E. Wayne Nordberg, 126,250; and Donnell A. Segalas, 128,750.

37

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This section discusses certain direct and indirect relationships and transactions involving us and certain persons related to us. A. Alexandra Denahan is the sister of Wellington J. Denahan, our Chairman of the Board and Chief Executive Officer, and is employed by us as Deputy Chief Financial Officer of Annaly and FIDAC and received $4,500,000 in salary and bonus during 2012. Ms. Alexandra Denahan is not an executive officer. Matthew J. Lambiase is the son of our director, John A. Lambiase, and is employed by us as Managing Director and Head of Business Development, and received $5,100,000 in salary and bonus for 2012. Mr. Matthew Lambiase is not an executive officer. Ms. Alexandra Denahan and Mr. Lambiase also participate in other employee benefit plans and arrangements which are generally made available to other employees at their level (including health, vacation, Section 401(k) and insurance plans). The compensation of these individuals was established in accordance with our employment and compensation practices applicable to employees with equivalent qualifications, experience and responsibilities.

The Manager is Annaly Management Company LLC, a Delaware limited liability company. The Manager is owned by our management.

If the Management Externalization Proposal is approved, our Manager will be responsible for paying all compensation expense associated with managing us and our subsidiaries. Instead, we will pay our Manager a management fee and our Manager will use the proceeds from the management fee to pay compensation to its officers and personnel, including our executive officers. The owners of the Manager will be entitled to receive any profit the Manager earns from the management fee either in the form of distributions by our Manager or increased value of their ownership interests in the Manager.

Approval of Related Person Transactions

Each of our directors, director nominees and executive officers is required to complete an annual disclosure questionnaire and report all transactions with us in which they and their immediate family members had or will have a direct or indirect material interest with respect to us. We review these questionnaires and, if we determine it to be necessary, discuss any reported transactions with the entire board of directors. We do not, however, have a formal written policy for approval or ratification of such transactions, and all such transactions are evaluated on a case-by-case basis. If we believe a transaction is significant to us and raises particular conflict of interest issues, we will discuss it with our legal counsel, and if necessary, we will form an independent board committee which has the right to engage its own legal and financial counsel to evaluate and approve the transaction. An example of this process was our acquisition of FIDAC from certain of our executive officers. Other types of transactions, such as employment of individuals who may be related to our executive officers or directors which are described above, are discussed by the board of directors, but not approved or ratified by the board.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our compensation committee is comprised solely of the following non-employee directors: Messrs. Nordberg (Chair), Green and Segalas. None of them is serving or has served as an officer or employee of us or any affiliate or has any other business relationship or affiliation with us, except his service as a director, and there are no other compensation committee interlocks that are required to be reported under the rules and regulations of the Securities Exchange Act of 1934, as amended.

38

EQUITY COMPENSATION PLAN INFORMATION

On May 27, 2010, at our 2010 Annual Meeting of Stockholders, our stockholders approved the Incentive Plan. The Incentive Plan authorizes the Compensation Committee of the board of directors to grant options, stock appreciation rights, dividend equivalent rights, or other share-based award, including restricted shares up to an aggregate of 25,000,000 shares, subject to adjustments as provided in the Incentive Plan. Existing awards made under the Prior Plan for executive officers, key employees and nonemployee directors will remain effective. Stock options are issued at the current market price on the date of grant.

The following table provides information as of December 31, 2012 concerning shares of our common stock authorized for issuance under our Incentive Plan and Prior Plan.

Plan Category

Number of securities to

be issued upon exercise

of outstanding options,

warrants and rights

Weighted-average

exercise price of

outstanding options,

warrants and rights

Number of securities

remaining available for

future issuance under

Plan (excluding

previously issued)

Equity compensation plans approved by security holders

5,618,686

$

15.74

24,952,754

Equity compensation plans not approved by security holders

-

-

-

Total

5,618,686

$

15.74

24,952,754

REPORT OF THE AUDIT COMMITTEE

Since our inception, we have had an audit committee composed entirely of non-employee directors. The members of the audit committee meet the independence and experience requirements of the New York Stock Exchange. The board of directors has determined that Mr. Brady is the audit committee financial expert and is an independent director within the meaning of the applicable rules of the Securities and Exchange Commission and the New York Stock Exchange. In 2012, the Committee met four times. The audit committee has adopted a written charter outlining the practices it follows. A full text of our audit committee charter is available for viewing on our website at www.annaly.com. Any changes in the charter or key practices will be reflected on our website.

During the year 2012, at each of its meetings, the audit committee met with the Chief Financial Officer and our independent registered public accounting firm. The audit committee’s agenda is established by the audit committee’s chairman. During the year 2012, the audit committee engaged Ernst & Young LLP as our independent registered public accounting firm and reviewed with our Chief Financial Officer and the independent registered public accounting firm, overall audit scope and plans, the results of external audit examination, evaluations by the independent registered public accounting firm of our internal controls and the quality of our financial reporting.

The audit committee has reviewed and discussed the audited financial statements with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. In addressing the quality of management’s accounting judgments, members of the audit committee asked for and received management’s representations that our audited financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, and have expressed to both management and registered public accounting firm their general preference for conservative policies when a range of accounting options is available.

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In its meetings with representatives of the independent registered public accounting firm, the audit committee asks them to address, and discusses their responses to several questions that the audit committee believes are particularly relevant to its oversight. These questions include:

●

Are there any significant accounting judgments made by management in preparing the financial statements that would have been made differently had the registered public accounting firm themselves prepared and been responsible for the financial statements?

●

Based on the registered public accounting firm’s experience, and their knowledge of us, do our financial statements fairly present to investors, with clarity and completeness, our financial position and performance for the reporting period in accordance with generally accepted accounting principles, and SEC disclosure requirements?

●

Based on the registered public accounting firm’s experience, and their knowledge of us, have we implemented internal controls that are appropriate?

The audit committee believes that, by thus focusing its discussions with the independent registered public accounting firm, it can promote a meaningful dialogue that provides a basis for its oversight judgments.

The audit committee also discussed with the independent registered public accounting firm other matters required to be discussed by the registered public accounting firm with the audit committee under the standards of Public Company Accounting Oversight Board. The audit committee received and discussed with the registered public accounting firm their annual written report on their independence from us and our management, which is made pursuant to applicable requirements of the Public Company Accounting Oversight Board, and considered with the registered public accounting firm whether the provision of non-audit services is compatible with the registered public accounting firm’s independence.

In performing all of these functions, the audit committee acts only in an oversight capacity and, necessarily, in its oversight role, the audit committee relies on the work and assurances of our management, which has the primary responsibility for financial statements and reports, and of the independent registered public accounting firm, who, in their report, express an opinion on the conformity of our annual financial statements to generally accepted accounting principles and on the effectiveness of our internal control over financial reporting as of year end.

In reliance on these reviews and discussions, and the report of the independent registered public accounting firm, the audit committee has recommended to our board of directors, and our board of directors has approved, that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2012 for filing with the Securities and Exchange Commission.

The foregoing report has been furnished by the current members of the audit committee:

At the annual meeting, the stockholders are being asked to approve our entering into a management agreement with Annaly Management Company LLC, or the Manager, under which the Manager will assume responsibility for our management, and therefore, we will be externally managed. We refer to this transformation as the ManagementExternalization Proposal. This will result in all members of our management, including all of our executive officers, being employed by the Manager. The proposed management agreement is attached as Exhibit A to this proxy statement. At a meeting of our board of directors held on March 14, 2013, our independent directors, without the participation of board members who are or are related to members of management, unanimously voted to approve the Management Externalization Proposal and submit it for approval by our stockholders.

Recommendation of Our Board of Directors

The independent members of our board of directors have determined that the Management Externalization Proposal is fair to, and in the best interests of, our company and our stockholders. Accordingly, the independent members of our board of directors recommend that our stockholders vote “FOR” approval of the ManagementExternalization Proposal.

Summary

If the Management Externalization Proposal is approved, we will be externally managed by the Manager through the authority delegated to it in the management agreement and pursuant to the policies established by our board of directors. The Manager would, subject at all times to the supervision and direction of our board of directors, be responsible for, among other things, (i) the selection, purchase and sale of assets for our investment portfolio; (ii) recommending alternative forms of capital raising; (iii) supervising our financing and hedging activities; and (iv) day to day management functions. The Manager would perform such other supervisory and management services and activities relating to our assets and operations as may be appropriate or may be requested by our board of directors.

Under the management agreement, we would pay the Manager a management fee equal to 1.05% of our stockholders’ equity (as described below), and the Manager would be responsible for paying all compensation expenses associated with managing us and our subsidiaries. We expect that most of our employees will become employees of our Manager. For regulatory and corporate efficiency reasons, we may retain certain employees as employees of our subsidiaries; however, all compensation expenses associated with such employees will reduce the management fee.

We believe that the 1.05% fee is the lowest fixed percentage fee paid to any external manager in our industry. If we had paid that fee in 2010, 2011 and 2012 instead of paying compensation to our employees, we would have saved $83.5 million, $104.4 million and $48.0 million, respectively. We estimate that when comparing the management fee to our annual compensation expenses for 2012, implementing the Management Externalization Proposal would result in savings over the next five years with an estimated net present value at April 1, 2013 of approximately $210.9 million. This estimate assumes stockholders’ equity is equivalent to stockholders’ equity as of December 31, 2012, calculated as defined in the section “Management Fee”, and remains constant for the five year period. This estimate uses a 5% discount rate. This estimate also assumes that annual compensation expenses would have remained what they were in 2012.

We have taken steps to ensure that the management agreement is more favorable to our shareholders than management agreements governing our externally managed peers. Specifically, the management agreement can be terminated for any or no reason by two-thirds of our independent directors or the holders of a majority of the outstanding shares of common stock, at any time upon one hundred eighty (180) days prior written notice without paying a termination fee. Moreover, the management agreement provides that if the Manager is sold without the consent of the independent members of our board of directors, the management agreement will automatically terminate without payment by us of a termination fee.

41

If the Management Externalization Proposal is approved, we will institute a stock ownership requirement under which our five most senior executive officers, over the next three years, own an amount of our shares of common stock equal to at least 6 times their 2012 base salary which represents an aggregate ownership of $38.7 million.

The Manager is also prohibited from managing, operating, joining, controlling, participating in, or advising any real estate investment trust whose principal business strategy is based on or who engages in the trading, sales or management of mortgage-backed securities in any geographical region in which we engage in such business (which is currently the entire United States). Additionally, our executive officers will enter into employment contracts with the Manager which prohibit them from working for or advising any of our competitors for one year after their employment terminates if they are terminated for cause or they voluntarily terminate their employment (other than for good reason).

The Management Externalization Proposal

Background

The independent members of our board of directors are aware that a number of our peers are externally managed pursuant to management agreements between those companies and external managers. This is a trend that has continued during the past several years with respect to a number of recently formed mortgage REITs. For example, since January 2009 sixteen mortgage REITs have conducted initial public offerings. Fifteen of these companies are externally managed. A list of these transactions is as follows:

Company

Date

Form of Management

CYS Investments Inc.

June 2009

Internally Managed(1)

Invesco Mortgage Capital Inc.

June 2009

Externally Managed

PennyMac Mortgage Investment Trust

July 2009

Externally Managed

Starwood Property Trust Inc.

August 2009

Externally Managed

CreXus Investment Corp.

September 2009

Externally Managed

Colony Financial Inc.

September 2009

Externally Managed

Apollo Commercial Real Estate

September 2009

Externally Managed

Two Harbors Investment Corp.

October 2009

Externally Managed

AG Mortgage Investment Trust

June 2011

Externally Managed

Apollo Residential Mortgage, Inc.

July 2011

Externally Managed

American Capital Mortgage Investment Corp.

August 2011

Externally Managed

Ares Commercial Real Estate

April 2012

Externally Managed

Western Asset Mortgage Capital Corporation

May 2012

Externally Managed

Javelin Mortgage Investment Corp.

October 2012

Externally Managed

ZAIS Financial Corp.

February 2013

Externally Managed

Five Oaks Investment Corp.

March 2013

Externally Managed

(1)

CYS Investments, Inc. was previously externally managed and became an internally managed REIT on September 1, 2011.

42

In addition, Anworth Mortgage Asset Corporation, a mortgage REIT that was previously internally managed, conducted an externalization transaction on December 31, 2011.

The concept of externalizing our management was initially presented to our management by an unaffiliated financial advisor in October 2010. At that time, our management determined that it would not pursue an externalization transaction. In 2011 as more mortgage REITs similar to us were externally managed, our management revisited the idea of a management externalization. A number of other unaffiliated financial advisors also approached us to discuss externalization. Our management initially discussed an externalization transaction with our board of directors in a preliminary manner in December 2011. In May 2012, our management and board of directors had further discussions with respect to an externalization transaction; however, no proposal to externalize management was made at such time. Following a number of discussions between our management and the independent members of our board of directors in the subsequent months, our management formally proposed an externalization transaction to the independent members of our board of directors in December 2012.

Accordingly, during 2012 and through March 2013, in light of existing market conditions and other factors, our investment objectives and strategy, our status as a REIT and the potential benefits of the externalization, the independent members of our board of directors undertook a detailed analysis of whether we should consider externalizing our management. In February 2013, the independent members of our board of directors engaged Credit Suisse as their financial advisors and King & Spalding LLP as their legal advisors. The independent members of our board of directors engaged in discussions with our executive officers to determine their willingness to become employed directly by the Manager and, in the case of our executive officers, terminate their employment agreements with us. In addition, the independent members of our board of directors reviewed and negotiated the terms of the management agreement with representatives of the Manager. In so doing, they examined carefully the terms of the management agreements of our peers and compared them to the terms of the management agreement. The independent members of our board of directors further examined our ability to enforce the terms of the management agreement against the Manager and, in particular, our ability to enforce representations and warranties and covenants that are in the management agreement. The independent members of our board of directors met a number of times with their financial and legal advisors. The independent members of our board of directors and our management had initially agreed that the proceeds of any sale of the Manager would be paid to us. However, we subsequently determined based on further advice from certain of our external advisors, that for tax and accounting reasons the proceeds of any sale of the Manager would be paid to the Manager and not us. The management agreement provides that if the Manager is sold without the consent of the independent members of our board of directors, the management agreement will automatically terminate without payment by us of a termination fee.

During the past several years, a number of changes have occurred in our business and in the market that the independent members of our board of directors believe makes it desirable for us to externalize our management functions. Specifically, our board of directors believes that as an externally managed REIT, we may be more attractive to certain investors and market analysts as the management fee, which replaces our compensation expenses, may be easier to compare to that of our public competitors, the majority of which are externally managed. As such, we may enjoy enhanced market perceptions through the ability of investors to compare us more directly with our competitors. Our executive officers have agreed to terminate their existing employment agreements with us, eliminating a substantial cost that we would incur if we terminated those agreements without their consent. We believe we will benefit from externalizing our management functions under a management contract that bases the management fee only on a percentage of our stockholders’ equity, with no fees tied to performance thresholds. This is a structure that has been adopted by many of our peers and that appears to have found acceptance in the investment community. Additionally, we believe that this fee structure is more favorable than if it were based on total assets under management, which could potentially incentivize an external manager to excessively leverage assets under management in an attempt to increase short term incentive payouts.

43

After reviewing a significant amount of information available to them at a series of meetings and in consultation with Credit Suisse, the financial adviser to the independent members of our board of directors, at a meeting held on March 14, 2013, our independent directors, without the participation of board members who are or are related to members of management, determined that the ManagementExternalization Proposal is fair to, and in the best interests of, our company and our stockholders.

If the Management Externalization Proposal is approved by our stockholders, our management will be conducted by the Manager through authority delegated to it under the management agreement, subject to the supervision and direction of our board of directors.We anticipate that, if it is approved, the external management arrangement will begin on July 1, 2013. However, the management fee will apply to all of 2013 and we will receive credit against the management fee for compensation expense we have incurred during the portion of 2013 before the management agreement takes effect.

Board of Directors Review of the Management Externalization Proposal

In reaching the determination that the Management Externalization Proposal is fair to, and in the best interests of, us and our stockholders, the independent members of our board of directors reviewed a significant amount of information, including the material terms of certain publicly available management agreements between various externally managed mortgage REITs and their respective external managers, consulted with our management as well as its outside legal counsel and financial advisor, and considered our short term and long term interests. The factors considered by the independent members of our board of directors include the following:

●

The fact that if the management agreement had been in effect in 2010, 2011 and 2012, our costs (including tax costs) in those years would have been, respectively, $83.5 million, $104.4 million and $48.0 million lower than they were.

●

Our belief that when comparing the management fee to our annual compensation expenses for 2012, implementing the Management Externalization Proposal would result in savings over the next five years with an estimated net present value of approximately $210.9 million. This estimate assumes stockholders’ equity is equivalent to stockholders’ equity as of December 31, 2012, calculated as defined in the section “Management Fee”, and remains constant for the five year period. This estimate uses a 5% discount rate. This estimate also assumes that annual compensation expenses would have remained what they were in 2012.

●

The certainty that a percentage cap on the management fee provides our stockholders.

●

Our belief that the terms and conditions of the management agreement compare favorably to those that our peers are subject to, including having the lowest fixed management fee as a percentage of stockholders’ equity and effectively capping our compensation costs at 1.05% of stockholders’ equity.

●

The capping of our compensation costs at 1.05% of stockholders’ equity also provides certainty to our stockholders that our compensation costs as a percentage of stockholders’ equity will not increase as we diversify our investment portfolio beyond Agency mortgage-backed securities and debentures by allocating up to 25% of our stockholders’ equity to assets other than Agency mortgage-backed securities and debentures. Management fees as a percentage of stockholders’ equity are generally higher for externally managed REITs that invest in assets other than Agency mortgage-backed securities, and capping our compensation costs at 1.05% of stockholders’ equity provides savings to our stockholders, as compared to comparable externally managed REITs, as we diversify a portion of our investment portfolio into these additional asset classes.

44

●

Our expectation that shareholders will have the benefit of the compensation savings created by the externalization for the entire 2013 calendar year pursuant to a pro forma adjustment to the 2013 management fee.

●

The greater anticipated ability to retain the proven expertise and substantial experience of our executive officers who we believe are critical to our successful performance in the future and a greater anticipated ability to retain and develop executives as part of our executive succession planning. Our anticipation is based on our belief that the Manager will be better able to structure its employment retention and development programs under the same regulatory and disclosure framework as our public competitors, the majority of which are externally managed, as well as private competitors such as hedge funds and other asset managers.

●

The greater anticipated stability and predictability of annual expenses and cost savings resulting from an externally managed company.

●

Our belief that this will improve the efficiency and alignment of management responsibilities for our various business lines.

●

Our belief that this fee structure is more favorable than if it were based on total assets under management, which could potentially incentivize an external manager to excessively leverage assets under management in an attempt to increase short term incentive payouts.

●

The alignment of shared performance goals through our adoption of stock ownership requirements for certain of our executive officers.

●

Our board of directors is aware that a number of our peers are externally managed pursuant to management agreements between those companies and external managers. This is a trend that has continued during the past several years with respect to a number of recently formed mortgage REITs. For example, since January 2009 sixteen mortgage REITs have conducted initial public offerings. Fifteen of these companies have been externally managed. In addition, an internally managed REIT has converted to an externally managed REIT.

●

Our board of directors believes that as an externally managed REIT, we may be more attractive to certain investors and market analysts as the management fee, which replaces our compensation expenses, may be easier to compare to that of public competitors, the majority of which are externally managed. As such, we may enjoy enhanced market perceptions through the ability of investors to compare us more directly with our competitors.

●

The elimination of the non-deductibility, under the Internal Revenue Code Section 162(m), of compensation expense relating to certain payments made to certain of our executive officers.

●

Credit Suisse’s review with the independent directors of certain of the material terms of certain publicly available management agreements between various externally managed mortgage REITs and their respective external managers, as summarized below in the section “Review Provided by Credit Suisse”.

45

Our independent members of our board of directors considered certain factors which could, as a result of the Management Externalization Proposal, negatively affect our company and our stockholders. These factors included the following:

●

We would be responsible for paying the management fee irrespective of our performance (unless we terminate the management agreement).

●

The possibility that the financial markets will not view the Management Externalization Proposal in a positive light and that the consummation of the proposal could have a negative effect on the market price of our common stock.

The reduced transparency in individual named executive officer compensation.

While the independent members of our board of directors considered all of the above factors, it did not make specific determinations with respect to each of the factors and did not find it practical to, and did not, quantify or otherwise attempt to assign relative weights to the specific factors considered in making its determination. Rather, the independent members of our board of directors made its judgment with respect to the Management Externalization Proposal based on the total mix of information available to it, and the judgments of individual directors may have been influenced to a greater or lesser degree by their individual views with respect to different factors.

In considering the recommendation of the independent members of our board of directors with respect to the Management Externalization Proposal, our stockholders should also consider that the Manager is owned by our management. The proceeds of any sale of the Manager will be paid to the owners of the Manager (and not us), whether or not the sale is consummated with the consent of the independent members of our board of directors, but the management agreement will automatically terminate if any such sale is consummated without the consent of the independent members of our board of directors. In addition, the owners of the Manager will be entitled to receive any profit the Manager earns from the management fee either in the form of distributions by our Manager or increased value of their ownership interests in the Manager. This may cause our management to have interests in the Management Externalization Proposal that conflict with our interests and those of our stockholders who have no interest in the Manager. None of our independent directors are affiliated with the Manager.

In order to attempt to ensure that these interests would not result in any actual or perceived conflicts with the duties of our independent directors, our board of directors deliberated regarding the ManagementExternalization Proposal in executive session without the participation of board members who are also members of management and who have interests in the ManagementExternalization Proposal.

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Management Agreement Peer Comparison

The independent members of our board of directors believe the terms and conditions of the management agreement compare favorably to the terms and conditions that currently exist between our peers and their respective external managers. The following table compares the key terms and conditions of our proposed management agreement to our peers.

As a percentage of stockholders’ equity and includes those peers that calculate management fees based on a sliding scale.

Certain of these material terms reviewed with the independent directors by Credit Suisse are summarized below in the section “Review Provided by Credit Suisse”.

Potential Cost Savings

The independent members of our board of directors carefully evaluated whether it believed externalization would save our stockholders money. After reviewing a substantial amount of information regarding the historical costs associated with our compensation and benefits, our general and administrative expenses (“G&A”) and our loss of deductions due to Section 162(m) of the Internal Revenue Code, the independent members of our board of directors determined that we potentially could save significant amounts if we affected the externalization.

We estimate that had we implemented the Management Externalization Proposal in 2010, we would have had the following savings for the years ended December 31, 2012, 2011 and 2010 of $48.0 million, $104.4 million and $83.5 million, respectively.

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Our estimates are based on the following table which shows our historical compensation for those years compared to the expected pro-forma costs and savings under the management agreement:

Pro Forma Comparison

(dollars in millions)

Year

Actual

Pro Forma

Total

Compensation Expense

Section

162(m) Tax

Expense(1)

Other

G&A

Total(2)

Management

Fee(3)

Other

G&A

Total

Pro Forma

Savings(4)

2010

$

147.0

$

28.9

$

24.5

$

200.4

$

92.4

$

24.5

$

117.0

$

83.5

2011

206.3

44.1

31.1

281.4

145.9

31.1

177.0

104.4

2012

190.7

22.3

44.9

257.9

165.0

44.9

209.9

48.0

(1)

The amounts in this column include the cost to us of lost tax deductions for the covered years as a result of the limitation on tax deductions imposed by Internal Revenue Code Section 162(m).

(2)

This column includes compensation, and the loss to us of Section 162(m) tax deductions relating thereto in 2010 and 2011, with respect to Michael Farrell, our co-founder and former Chairman of the Board, Chief Executive Officer and President, who died in October 2012. Such amounts totaled $36.0 million, $53.7 million and $32.0 million for 2010, 2011 and 2012, respectively.

Amounts in this column reflect expected pro-forma savings to us for the covered years related to the lower compensation under the management fee as well as tax deductions that would not have been lost as a result of Internal Revenue Code Section 162(m) had the Management Externalization Proposal been in effect during the covered years. Pro forma savings for 2012 would have been larger had we paid our executive officers their targeted bonus amounts, which are described in a table in the “Compensation Discussion and Analysis” section of this proxy statement.

The tables below present, as a percentage of average stockholders’ equity (calculated as defined in the management agreement, see “Proposal 2 – Management Externalization Proposal – The Management Externalization Proposal – Management Fee”) and average assets, (1) actual compensation expenses, Section 162(m) tax expense and other G&A and (2) pro forma compensation expense (which consists of the management fee), Section 162(m) tax expense and other G&A under the management agreement over the last three years.

We believe that when comparing the management fee to our annual compensation expenses for 2012, implementing the Management Externalization Proposal would result in savings over the next five years with an estimated net present value of approximately $210.9 million. This estimate assumes stockholders’ equity is equivalent to stockholders’ equity as of December 31, 2012, calculated as defined in the section “Management Fee”, and remains constant for the five year period. This estimate uses a 5% discount rate. This estimate also assumes that annual compensation expenses would have remained what they were in 2012.

Failure to Approve the Management Externalization Proposal

If our stockholders do not approve the ManagementExternalization Proposal, we will continue to operate within our current structure as an internally managed company and our executive officers’ employment agreements will not be terminated.

The Management Agreement

The management agreement requires our Manager to manage our and our subsidiaries’ business affairs in conformity with the policies and the asset guidelines that are approved and monitored by our board of directors. Our Manager’s role as manager is under the supervision and direction of our board of directors. Our Manager would at all times be subject to the supervision and direction of our board of directors and would be responsible for, among other things (i) the selection, purchase and sale of assets for our investment portfolio; (ii) recommending to the board of directors alternative forms of capital raising; (iii) supervising our financing and hedging activities; and (iv) day to day management functions. The Manager would perform such other supervisory and management services and activities relating to our assets and operations as may be appropriate or may be requested by our board of directors. Our Manager is responsible for our management and supervising and causing to be performed such services and activities relating to our assets and operations as may be appropriate, which may include, without limitation, the following:

●

serving as our consultant with respect to the periodic review of the investment criteria and parameters for our assets, borrowings and operations, any modifications to which will be approved by a majority of our independent directors;

with respect to prospective purchases, sales, or exchanges of assets, conducting negotiations on our behalf with sellers and purchasers and their respective agents, representatives and investment bankers;

●

advising our board of directors with respect to alternative forms of capital raising;

engaging and supervising, on our behalf and at our expense, independent contractors which provide investment banking, mortgage brokerage, securities brokerage, other financial services, due diligence services, underwriting review services, and all other services that may be required relating to our operations or assets (or potential assets);

●

advising us on, preparing, negotiating and entering into, on our behalf, applications and agreements relating to programs established by the U.S. Government or other governments;